Many retirement savers opt to move their pre-tax savings from workplace plans into individual retirement accounts (IRAs). It’s important to be mindful that investment fees associated with an IRA may be higher than with an employer-sponsored account.
Note that IRA owners must begin taking annual distributions at age 72, known as required minimum distributions (RMDs). Rollover IRAs often provide more investment options than their 401(k) counterparts and consolidating multiple retirement accounts can make management simpler.
What Can’t Be Rolled Over into an IRA?
Clients request IRA rollovers for various reasons: consolidating retirement accounts, performing Roth IRA conversions or moving them from one financial institution to the next. Unfortunately, this process is rather complex and clients must follow specific rules in order to avoid incurring additional income taxes and penalties.
One of the most frequently performed rollovers involves moving funds from an old employer’s 401(k) into an IRA, enabling employees to consolidate all their retirement savings in one location while accessing a variety of investment options.
Certain distributions cannot be rolled over into an IRA, including Required Minimum Distributions, loans treated as distributions and hardship withdrawals. The IRS provides an excellent rollover chart on their website which lists all of these rules.
IRAs enable investors to choose their investments at will, taking advantage of tax-deferred investment growth. Plus, you can move them between financial institutions without incurring penalty or taxes when necessary.
Roth IRAs do come with some restrictions, including a maximum contribution limit for 2023 of $6,500 or $7,500 if over 50, and mandatory minimum distribution rules starting after age 70. They also don’t provide as many investment options or lower fees than other accounts.
Advice your clients of the rules surrounding IRA rollovers to avoid costly mistakes and ensure compliance with regulations. Gain knowledge about various types of IRAs, how to roll funds over, and the proper handling of non-reportable withdrawals.
Traditional IRAs provide pretax retirement savings, with withdrawals taxed at ordinary income rates when taken out in retirement. They do not qualify as rollover candidates into other employer plans and the IRS restricts how often funds may be moved between IRAs in a year.
Indirect rollovers must only occur once every year; the one-rollover-per-year rule also applies to SEP and SIMPLE IRAs. Furthermore, the IRS discourages holding collectibles such as gold in an IRA and requires that its investments consist solely of mutual funds, exchange-traded funds and stocks.
SEP IRAs are available to any business owner or freelancer operating a business, including freelancers. This retirement account requires less paperwork and forms than most others and allows up to 25% of compensation (pay an employee receives for work over an annual period, including bonuses and overtime pay) be contributed into by owners as part of an SEP IRA contribution plan.
However, its annual contribution limit is much lower than with traditional IRAs or employer-sponsored plans like 401(k). A SEP IRA also doesn’t permit catch-up contributions for people over 50, making this option less appealing to employees looking to grow their savings. It is generally better suited for companies with less than 100 workers.
A SIMPLE IRA is an employer-sponsored retirement plan that allows employees to make salary reduction contributions on a pre-tax basis through payroll deduction. Establishing and operating such plans may be less complex and more cost effective than their more complex counterparts such as traditional 401(k) plans or similar arrangements.
Employees are automatically 100 percent vested in any employer-matched contributions that travel with them if they leave their current job, and are allowed to choose which financial institution hosts their personal account.
SIMPLE IRAs differ from SEP IRAs in that there are no contribution limits; however, withdrawals are subject to similar limitations as traditional IRAs with an extra 10% tax applied during their first two years of participation. Furthermore, participants can only move assets between SIMPLE IRAs once per year without incurring penalties.