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Subject:  Re: Vanguard IRA Date:  7/3/1997  10:08 AM
Author:  TMFPixy Number:  97 of 88513

Yo, golfingfool.

<<Tom... regarding transfers and rollovers... they are virtually one in the same... that is the 'safest' way to switch your tax deferred savings from one account to another... if you have the money sent to you with the ability to cash it yourself... it is a BIG temptation... but keep in mind the 20% penalty on any cash you take from it PLUS the fact that it is also added to your yearly income and depending on your tax bracket... there is another 15 to 28% or more on top of that..... i recently had a transfer (rollover) done for me to my money market account account at my bank and the check was made out to my bank as a custodian for my account... I am not one that can resist temptation <G> >>

I believe you're under a misconception here, so I'll sound another word of caution. A direct transfer and a rollover, while similar in their ultimate outcome, are definitely NOT the same kind of transaction. A rollover from one IRA (or qualified retirement plan) to another occurs when YOU get the funds from the old vehicle in a check made out in your name. On receipt of that check, you have 60 days to roll that money to another IRA to avoid taxation. You may roll that money only once every twelve calendar months. A direct transfer occurs when you never have actual or constructive receipt of that money. Instead, it goes directly from the old IRA or plan custodian to the new custodian. A direct transfer may occur as often as you want, and no adverse tax impacts will ensue.

As to your statement regarding the "...20% penalty on any cash you take from it ...," I think you're mixing two concepts here. The first deals with ordinary income tax withholding, and the other with the excise tax on early withdrawals from retirement plans and IRA. Neither will occur in a direct transfer, and both could occur in rollover. Let's see how.

You retire from work or take money from an IRA and receive the cash from your plan or IRA in a check made out in your name. By law, the custodian must withhold 20% of the proceeds against your potential tax bill for the year. (Note: IRA custodians may and will waive this requirement if notified in advance that the withdrawal is for the purpose of rollover; plan custodians may not and will not waive the withholding requirement.) You now get the check and have 60 days to roll it to an IRA to avoid taxation. The check, though, is only for 80% of the withdrawal. If you just roll that amount to the IRA, you have an incomplete rollover. To avoid that, you must come up with the missing 20% from other resources and add that amount to your rollover deposit within the 60 days. If you fail to do that, at the end of the year the IRS will say you received the missing 20% as a distribution. It will be counted as part of your income for the year, and you will be taxed on that amount. Worse, if you are under age 59 1/2 (55 for retirement plan distributions), you will also be assessed a 10% excise tax as a penalty for taking a premature distribution from the IRA or plan.

With a direct transfer, you don't have to worry about any of this. There is no withholding. There is no restriction on how often the transfers may occur. There is no potential for an unintended distribution. There is no 60-day time limit to be concerned about.

Moral: Generally, usually, normally ... A direct transfer is the best way to go.

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