Rollover IRAs – What Can a Traditional IRA Be Rolled Into?
Many individuals roll over their retirement accounts when changing jobs to maintain tax-deferred growth and take advantage of more attractive investment options. This requires using trust-to-trustee transfers, which require careful consideration when planning.
Traditional IRAs may be converted to another IRA or an employer-sponsored retirement account such as 401(k). They can also contain non-deductible contributions and earnings.
An IRA rollover may help lower your tax bill in retirement. Unlike 401(k) plans, most traditional IRAs don’t require you to pay taxes until withdrawal at age 59 1/2. Before making this decision, however, consult with a financial professional. IRAs offer more investment choices than employer-sponsored plans; however they also impose restrictions that limit how you use IRA funds; for instance you cannot use them to purchase real estate with debt financing or use funds in certain investments that involve debt financing.
Traditional IRAs provide you with tax advantages, making contributions tax deductible while withdrawals will be taxed as income during retirement. Other options are Roth or SEP IRAs which permit contributions after taxes have been withheld from earnings; when rolling over your IRA into another qualified account be sure to complete this process within 60 days or incur taxes and penalties on any excess funds or penalties may apply.
Before making this decision, always consult a tax professional. A direct trustee-to-trustee transfer between accounts is often the easiest way of rolling an IRA over. Indirect rollovers may also be possible but must deposit their funds within 60 days for taxes and penalties to apply.
Indirect rollovers occur when your distribution arrives as a check from the IRS, withholding 20% as taxes payable back to the plan sponsor or financial institution holding your old retirement account.
An indirect IRA rollover can only occur once every 12 months; this rule does not include direct IRA-to-IRA transfers between accounts at different financial institutions, however. You may transfer pretax savings from traditional to Roth accounts but not vice versa – contributions made before taxes to traditional IRAs while contributions made after-tax via Roth IRAs differ considerably.
Non-deductible IRAs offer an ideal solution for saving for retirement but do not meet the eligibility requirements for tax deduction. It is essential to remember, however, that when using this type of account there are specific guidelines you must abide by in order to reap maximum benefit from its use.
When moving funds between different IRA types or financial institutions, direct transfers should take place to avoid taxes and withholding. This method is known as trustee-to-trustee transfer. It’s the quickest and most cost-efficient way to move funds.
Additionally, non-deductible IRA contributions must be reported annually with Form 8606 to avoid double taxation of investment earnings when withdrawing them in retirement. This form must be filed annually before May 15th; failing which, the IRS will assess a penalty equaling 6% of both your contributions and earnings for any unfiled forms.
Swanson vs. Commissioner is one case that has shed some light on IRA investment rules, offering some clarity: in this ruling by the Tax Court, an IRA could purchase and operate a business without violating prohibited transaction rules – this ruling applies to both traditional IRAs as well as rollover IRAs.
Before investing, however, it is wise to thoroughly assess the tax ramifications. Furthermore, you should consult a knowledgeable tax adviser.
IRAs are generally prohibited from investing in assets that provide the owner or beneficiary with personal gains; this rule is known as self-dealing or “prohibited transaction” rules, and if violated it can lead to income taxes and penalties being assessed against your account.