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Is a rollover IRA right for you? First, get the facts

Moving retirement funds around makes many people nervous because one wrong move can lead to expensive penalties and increased taxes. While there’s no substitute for working with a qualified financial advisor, the following information provides a helpful primer.

A rollover, conversion, and transfer are words that refer to moving money from one retirement account to another. However, there are rules for how you can move around retirement funds.

An IRA transfer is when you move funds between the same variety of retirement accounts. When you move funds between two different varieties of retirement accounts, it’s called a rollover. When you change a traditional IRA to a Roth IRA, it’s called a Roth conversion.

Seems simple enough, right? However, the details are important because you don’t want to pay more in taxes than you have to. After all, retirement funds are meant for retirement. 

If you’re retiring, you may want to take advantage of IRA rollover guidelines to move money from your 401(k) plan to an IRA. It’s important to note that if money from a retirement plan is paid directly to you, it could result in a mandatory tax, whether or not you plan to roll it into another retirement plan at a later date. 

Taking this into consideration, it makes sense to roll over the funds into another retirement plan or IRA. In this situation, there are two distinct methods to perform an IRA rollover; a direct rollover or a trustee-to-trustee transfer.

The direct rollover option may be used in a situation where you receive a payment (also called a distribution) from a retirement plan. You simply ask your plan administrator to make the payment to an IRA (an IRA rollover) or to another retirement plan. If you’re receiving a distribution from an IRA, you can ask for the IRA payment to be made to another IRA or a retirement plan. This is called a trustee-to-trustee transfer.

There are a few other rules that require close attention. You can only perform an IRA rollover or transfer once per year. You must also ensure that the money is in the new account no later than 60 days from when it was withdrawn from the original account.

Can I perform an IRA rollover if I’m switching jobs?

In short, yes. In fact, you may even have some more choices to consider. You might be able to move into an IRA or a 401(k) with your new employer. It may even be possible to split funds between the two but this depends on the new employer’s 401(k) plan. 

Whether you’re retiring or switching jobs, it makes good sense to talk to an experienced financial advisor about your wealth management and retirement planning options. At Asset Preservation Tax & Retirement Services, we are ready to help, so contact us today and make sure you’re getting the most out of your hard-earned dollars.Moving retirement funds around makes many people nervous because one wrong move can lead to expensive penalties and increased taxes. While there’s no substitute for working with a qualified financial advisor, the following information provides a helpful primer.

Roth IRA conversions

Another option retirees may consider is a Roth IRA conversion. There are many advantages to a Roth IRA conversion but there are some important considerations that must be made in advance. 

The tax benefits of a Roth IRA are well known. You can make tax-free withdrawals during your retirement while benefiting from tax-free growth potential. As always, you should talk to a financial advisor about your specific situation before deciding on an IRA conversion but the following information is intended to help you better understand the benefits and potential drawbacks. 

If you transfer retirement funds from a traditional 401(k) or IRA into a Roth account, it’s called a Roth IRA conversion. While you are required to pay taxes on all monies converted, all future withdrawals are tax-free. There are obvious benefits to this financial strategy. For example, if you believe you will save money by paying taxes now rather than at a future date.

There are different ways to perform a Roth IRA conversion

There are three ways that a Roth IRA conversion may be accomplished; a direct rollover, a 60-day rollover, or a trustee-to-trustee transfer. Let’s break them down individually.

Direct Rollover - This process involves rolling money over from an employer’s 401(k) contribution plan to a new account. You may be issued a check from the administrator which you then deposit into the new account.

60-day Rollover - This is the process whereby money is paid to you and you then deposit all or part of the funds into a Roth IRA. Obviously, you have 60 days to make the deposit after receiving the funds.

Trustee-to-Trustee Transfer - This is the process whereby assets from your traditional IRA are directly transferred by that financial institution into the account where your new Roth IRA is held. This may be a different financial institution or the same financial institution.

Does a Roth IRA conversion make sense for me?

There are a host of considerations you should make before deciding on a Roth IRA conversion but if it’s right for you, the financial advantages are many. A few things you may want to consider include:

Where do you plan on living when you retire? If you’re moving to another state to enjoy the many pleasures of retirement, you may want to take a look at that state’s tax rates. Some states exclude retirement income (including payments from traditional IRAs) from state income tax and others do not. Conversely, understanding your options may even influence where you decide to retire.

Who will receive your retirement savings as part of your estate? If you plan on leaving retirement savings to your spouse, children, or another family member, you should consider how a Roth IRA conversion will affect their taxes. Heirs that receive IRA assets usually do not have to pay income taxes, so this may be a very appealing option. However, if your heirs are in a lower tax bracket than you, then a traditional IRA may be the better option, depending on a variety of other factors.

Do you have children who are of college age? If you have college-age children who are applying for federal financial aid, it’s possible that IRA conversion monies will be considered as income. This means that your children’s financial aid may be reduced because your expected financial contribution will be higher.