2 Types of Automatic Rollover

There are two ways that you may encounter an automatic rollover. The first is when funds are transferred into an individual retirement account through a distribution from a qualified retirement plan. There is no action on your part for this distribution to be made.

The second involves the reinvestment of the interest earned from a certificate of deposit (CD) in addition to the principle, when the CD matures. Again, no action is needed on your part; the financial institution automatically reinvests the proceeds. The new CD will mimic the maturity conditions of the original CD.

In the case of an IRA distribution, the IRS requires that the sponsors of most qualified defined contribution and benefit plans which have a provision for automatic cash-out to place specific mandatory distributions into said IRA. If you desire a different outcome you may select either to have the funds rollover into a designated retirement account or simply take the cash. The IRS regulations apply to any mandatory distribution that is in excess of $1,000 and which can be rolled over and is subject to Federal income taxes.

For CDs which are subject to automatic rollover, the CD is a way to ensure that the funds are reinvested. The catch is that you may not actually want the money to be placed back into an identical type of CD. If your goal is to move the money into another sort of investment, and you don’t act before the automatic rollover takes effect, you will have to pay a penalty to withdraw the funds from the new CD.

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