Rollover IRAs allow you to consolidate retirement savings left across various plans into one convenient account and defer taxes until withdrawing them at retirement time, potentially offering greater investment options than a traditional IRA.
Your IRA may only be rolled over once every 12 months and must be deposited within 60 days or it will count as a taxable distribution.
What is a rollover IRA?
Rollover IRAs are individual retirement accounts (IRAs) designed to house assets from previous employer retirement plans such as 401(k), 403(b), or profit-sharing plans and allow their holders to keep tax-deferred status of those funds.
Additionally, it allows you to consolidate all of your savings in one location instead of several – which may simplify and streamline your investment strategy and help track its progress more easily.
Rollover IRAs provide greater investment options than employer-sponsored plans and your money in an IRA is protected from creditors and judgments by federal law compared with amounts you roll over from contributory plans. If you need any advice about rolling over funds into an IRA account, consult your tax advisor or refer to IRS Publication 590-B; to gain more knowledge on IRAs see our guide!
Can I convert a rollover IRA?
It is essential that when transferring retirement funds, you abide by Internal Revenue Service rules to avoid taxes and penalties. Direct rollovers provide the simplest solution as funds can be moved directly between accounts (though indirect ones may also be possible).
Rollovers must be completed within 60 days of receiving a distribution and must be done through an IRA custodian or financial institution. When done properly, tax is typically not withheld from direct rollovers; indirect rollovers require taxes be withheld and deposits made back into an IRA account within 60 days or the IRS could consider your withdrawal as taxable and subject to penalties.
Other considerations when converting an IRA include investment options, required minimum distributions (RMDs) and fees. IRAs often provide greater investment choices than 401(k) accounts and are usually protected against creditors and judgments more reliably than employer-sponsored retirement plans.
Can I convert a traditional IRA to a Roth IRA?
Roth conversion can help you avoid taxes in retirement, but requires an upfront tax bill. To limit its impact, reach out to both old and new financial institutions to determine what paperwork needs to be filed; or wait until your income or assets have decreased to do the conversion.
IRS treats your traditional IRAs as one account; thus when converting to a Roth, prorate the after-tax balance and pretax balance equally when prorating to Roth conversion.
Rollover IRAs provide several advantages, such as avoiding immediate taxation on qualified transfers and access to a wider investment landscape than employer-based plans. A conversion, however, must be carefully planned in order to meet both long-term goals and current situations – especially considering any impacts such as on Social Security and Medicare taxes a Roth conversion may have; additionally it’s crucial that sufficient funds exist to pay any conversion taxes due.
Can I convert a Roth IRA to a traditional IRA?
Moving money from a traditional to Roth IRA may result in additional taxes being withheld from your retirement funds, so it’s wise to consult a financial professional when making this decision.
The IRS requires you to prorate your conversion based on how much of your total IRA balance consists of after-tax contributions versus pretax earnings, which may prove complicated if you hold multiple traditional IRA accounts with nondeductible and deductible contributions.
If you convert from a Roth to traditional IRA, the taxable portion of your distributions will be subject to income taxes at your current rate. While it is possible to defer this bill by moving funds back into a Roth IRA account, doing so would take away many of its benefits, including tax-free investment growth potential and possible early withdrawal penalties.