Waddell & Reed


What is a Rollover?
A rollover allows you to take a lump-sum distribution from your former employer's qualified retirement plan, such as a 401(k) or 403(b), and transfer it directly to another tax-deferred retirement plan account. One such retirement plan account is an IRA rollover at Waddell & Reed.

Rolling over plan assets to an IRA rather than keeping assets in a previous employer’s plan or rolling over to a new employer’s plan should reflect consideration of various factors, the importance of which will depend on your individual needs and circumstances.

Options for your assets
You have a variety of alternatives available to you with regard to the assets in your employer's plan. What you choose will depend on your previous employer’s plan document, your specific needs, and the advice of your tax advisor. The following chart describes distribution options available under current regulations.

Options Outcomes
Leave distribution in your former employer's plan. If your balance meets current governmental limits and plan provisions, you may leave the assets in the current plan. Employer retains responsibility for selecting investments available to you. Distribution options are controlled by the Plan Document.
Keep/spend your distribution from the qualified employer plan. 20% of the taxable portion of the amount will be withheld immediately and paid to the IRS at the time of withdrawal. You will be subject to federal (and state) income taxes on the taxable portion of the amount distributed, plus a 10% penalty for early withdrawal may apply if you are under age 55 when you retire or terminate service.* The amount of the distribution may increase your Modified Adjusted Gross Income (MAGI) to a threshold that imposes an additional 3.8% Medicare tax on certain investment income. Certain other penalty exceptions may apply.
Receive your distribution and deposit it into an IRA rollover. Lump-sum distributions may be deposited into an IRA rollover account within 60 days of distribution. Expect an immediate 20% tax withholding paid to the IRS on the taxable portion of the amount. The 20% shortfall must be made up from your own pocket to fulfill the entire rollover amount. Otherwise, the 20% amount withheld will be subject to income taxes and possible penalty taxes.*
Transfer your distribution directly into your new employer’s plan or an IRA rollover. Instead of receiving a lump-sum distribution from your retirement plan, your previous employer can transfer your distribution directly to a rollover IRA or to your new employer’s retirement plan, if the plan document includes this option. This allows you to avoid the 20% tax withholding and early withdrawal penalties, and you will defer income taxes on the distribution until you make withdrawals from the IRA or new employer’s plan.

* If you are between the ages of 55 and 59½ talk to your tax advisor about early withdrawal penalties, and potential exceptions.

Rollover Benefits
An IRA rollover offers:

  • No Current Income Taxes - You avoid current income taxes, including a mandatory 20% income tax withholding and possibly a 10% excise tax penalty, when you transfer.
  • Diversified Investment Options - Receive investment diversification and flexibility through a wide variety of mutual funds offered through Waddell & Reed.
  • Tax-Deferred Retirement Savings - Invest for your retirement years while paying no income taxes today. Investment earnings are tax deferred until withdrawn.
  • Withdrawal Flexibility - If you're between the ages of 59 ½ and 70 ½, you can withdraw what you need from your IRA rollover at any time without tax penalties. You will be responsible for taxes at your current tax rate on any withdrawals. After the age of 70 ½, current tax laws require you to make minimum withdrawals based on average life expectancy. Penalty exceptions are available and may be applicable to your situation.
  • Exceptions to Withdrawal Penalties - One of the IRS-approved penalty exceptions is the Substantially Equal Periodic Payment Plan which allows you to take distributions based on your life expectancy and receive an income stream from your IRA rollover at any age, without incurring an early withdrawal penalty. Again, income tax at your current tax rate will be assessed.

IRA Rollover Features, Options and Reports

  • Investment Selection
    Waddell & Reed offers you many investment options for your IRA rollover. Each has a specific investment objective that is designed to match your retirement planning needs. Options include domestic and international equity funds, growth and income funds, fixed income funds, and money markets funds — to name just a few. You also have the freedom to change investments within your IRA as you choose, without any tax consequence.
  • Diversification
    An IRA rollover with Waddell & Reed allows you to diversify your investment by selecting two or more of our mutual funds for your portfolio. Such diversification also effectively reduces the risk of having all your money in a single security.
  • Daily Account Access
    You can take advantage of two convenient ways to access your Waddell & Reed account 24 hours a day, seven days a week.
    • By phone-Waddell & Reed’s Voice Response Unit (VRU) provides around-the-clock access to your individual account.
    • Internet Access- Waddell & Reed’s online account access is available through our corporate website at www.waddell.com.
  • Distribution Options
    Waddell & Reed provides an Automated Flexible Withdrawal Service for clients under age 59 ½ who desire to take penalty-free distributions using a Substantially Equal Periodic Payments plan that follows IRC Sec. 72(t) regulation

    After age 70½, current tax laws require you to make minimum withdrawals based on uniform life expectancy tables. These Required Minimum Distributions are automatically made by Waddell & Reed as a service to you, at no additional cost.

    Generally no fees for processing the distribution transaction from your account, however contingent deferred sales charges (CDSC) may apply to the Share Class you have purchased. Please see the Mutual Fund Prospectus for additional information regarding the purchase and redemption of each mutual fund share class.

  • Recordkeeping
    You will receive a Transaction Confirmation each time you complete a purchase, redemption, transfer or exchange. You will receive a year-to-date statement for each calendar quarter, and a year-end statement after the end of each calendar year.

    You can elect to have all of your shareholder account statements delivered to you in one envelope. You can also elect to view your statements electronically and decline to receive paper statements in the mail.

  • Tax Reporting
    Each year, you will receive reports containing information about your IRA that you will need in order to file your income tax return.

  • IRA Rollover Transfers
    If you have established an IRA rollover, elsewhere, you can transfer your IRA to Waddell & Reed with no tax penalty. A Waddell & Reed financial advisor will be happy to explain how to properly transfer your IRA.

    Diversification does not guarantee a profit nor protect against loss.

Cash Distribution versus Rollover
While it may be tempting to cash out your assets in a former employer's retirement plan instead of rolling them into an IRA or keeping them in your employer's plan, the penalty is significant.

  Cash Distribution Rollover
Total in Your 401(k) Fund $25,0001 $25,000
Distribution/Rollover $25,000 $25,000
Automatic 20% Withholding -$5,000 $0
Additional Federal Taxes $1,2502 $03
10% Penalty $2,500 $0
Total Federal Tax and Penalties $8,7504 $0
You Receive $16,250 $25,000

1 Does not include after-tax contributions
2 Assumes marginal federal tax rate of 25 percent: 25 percent x $25,000 less $5,000 already withheld
3 Taxes deferred until distribution
4 In addition to federal taxes, you may owe state taxes depending on the law in your state.

Waddell & Reed nor its financial advisors offer tax advice. The data here is for informational purposes only. Contact your tax advisor/attorney before making changes to a retirement savings strategy.

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