An IRA could be the ideal vehicle for distributions from retirement plans or other tax-deferred accounts, provided you understand fees, investment options and penalty-free withdrawals before making your choice.
Voya financial professionals can help you evaluate all of the available options and understand their federal income tax consequences.
Non-IRA Accounts
In general, one 60-day rollover per 12-month period will suffice. This applies to distributions from IRAs, SIMPLE IRAs, SEP IRAs and other retirement accounts such as 401(k) plans.
There may be exceptions to the 60-day rollover rule if you can show financial hardship, or your account has been converted to a Roth IRA. Furthermore, you can bypass it altogether by performing a direct trustee-to-trustee transfer instead of withdrawals.
Rollover IRAs may be right for you if you have received a distribution from an employer-sponsored plan and wish to keep your retirement savings tax-deferred. Unfortunately, annual contributions cannot be made; however, you could use an IRA Certificate instead and earn fixed-rate investments without market fluctuations risk.
Tax-Deferred Accounts
When moving funds between retirement accounts, it’s crucial that they follow Internal Revenue Service rules in order to avoid taxes and penalties from the IRS. Direct transfers offer the most efficient method for moving money between traditional IRAs or employer-sponsored plans and new IRAs; indirect rollovers require you to manage this process yourself and may result in an IRS taxable event.
One restriction of tax-deferred accounts is their annual limit on rollovers; this varies between IRAs (SEP and SIMPLE IRAs included) and applies across each IRA type (IRA, SEP or SIMPLE). Any withdrawal before age 59 1/2 incurs an early withdrawal penalty of 10% of your withdrawal, designed to discourage early accessing of money intended for your future. It does not apply, however, when taking distributions after taxes have already been deducted – known as your basis amount.
Roth Accounts
As with traditional IRAs, Roth IRAs allow you to invest and withdraw contributions with no tax consequences at any time without penalty. Also, withdrawals of earnings are federal income tax-free provided they have been held for five years or longer.
Rollovers can be an efficient way to consolidate retirement savings accounts from multiple employers into one account, but it’s essential that you understand their limitations.
If you receive a distribution from an employer-sponsored plan and wish to roll it over into an IRA, you have 60 days from when the funds were received to deposit them with any amounts withheld for taxes into an indirect transfer (trustee-to-trustee transfer). Otherwise, the IRS considers your transaction a regular withdrawal, potentially subjecting it to income tax as well as possibly incurring the 10% early withdrawal penalty.
The IRS recently amended their rules regarding Roth conversions. Under these new guidelines, you are no longer able to recharacterize an indirect Roth conversion back into a traditional IRA within one year of initial conversion.
Non-Recourse Loans
Non-recourse loans provide financing options that limit lenders from seizing personal assets should the borrower default, making them appropriate for high-risk, high-reward endeavors such as commercial real estate investments.
Most IRAs do not allow for this form of financing, so it is wise to consult a financial professional prior to investing this way. A direct rollover from an employer plan may also be more tax-efficient than using non-recourse IRA rollover.
Lenders do not have to provide non-recourse financing, and its process and terms vary accordingly. A lender might stipulate certain metrics before turning a loan non-recourse, such as 90% occupancy for three months post capital improvements or having achieved a debt service coverage ratio (DSCR) of 1.20x or 1.25x; credit history will also play an influential role when considering non-recourse loans with higher interest rates compared with recourse loans.
