|
Rollovers are a hop, skip, and a jump from conventional
IRAs
|
You can move money in one traditional IRA to another traditional
IRA without penalty, and without owing income tax on any earnings that may have
accumulated. What you're doing is
rolling over your IRA. You can move the money yourself, by getting
a check for the amount in the existing IRA and depositing the check with the provider
of your new IRA. Or you can have the institution with your existing IRA transfer
the money directly to the provider of your new account.

If you roll over one traditional IRA to another traditional IRA,
or one Roth IRA
to another Roth, you have 60 days from the time you take the money out of the existing
account to deposit it in the new account. If you miss the deadline or deposit only
a portion of what you withdrew, you owe income tax on the amount you don't deposit
and potentially a 10% early withdrawal penalty if you're younger than 59½.
ROLLOVER IRAS You may also move assets
in an employer-sponsored plan, such as a
401(k), 403(b),
or 457 into an IRA if you retire, change jobs, or your employer ends the plan. Moving
the money to an IRA means that your retirement savings can continue to accumulate
tax deferred
until you are ready to begin withdrawals or move the money back into a new employer's
plan. This type of IRA is sometimes known as a
rollover IRA.
|
|
|
A ROTH CONVERSION One way to take
advantage of the tax-free income a Roth IRA provides is to convert your current
IRA to a Roth. You'll owe the tax due on your earnings (and on your investment amount
if you deducted your contributions), but no penalty. You're also eligible to convert
a tax-deferred
401(k)
or similar plan to a Roth IRA after you retire or leave the plan.
There are no income caps limiting who is eligible to make a conversion. Even if
you're not eligible to make an annual contribution to a Roth IRA, you can convert
to a Roth IRA.
You'll probably want to get some expert advice on whether this strategy pays for
you. The answer will depend on:
- How much you have to transfer
- Your current tax rate
- Your age
- The time until you plan to withdraw from the Roth
As with other Roth accounts, you must keep an account created with
converted funds open for at least five years before you can take tax-free withdrawals.
If you're not confident you can wait that long, it's probably not smart to transfer
your funds, pay the tax due, and then withdraw early, only
to be faced with more taxes (and potentially a penalty).
Remember that married people who file separate tax returns are not eligible to roll
over to a Roth. A tax adviser can help you decide whether you should file jointly
for one year in order to move your IRA. Another thing to consider is that the tax
on the amount you're moving is due in the year the IRA is moved. That could add
up to a lot of money if your account balance is substantial. And it could bump you
into a higher tax bracket, increasing what you owe even more. But if you have had
significant losses in your IRA before you move it into a Roth, you may owe very
little tax or none at all.
|
|
|
|
|
|
|
|
|
|
|
Glossary
|
|
Interactive Demos
|
|
Our Products
|
|
|
|
|
Try our interactive demo
to find out how contributing to a 401(k) can benefit you.
|
|
|
|
|
|