Roth IRA Rollovers and Rollover Conversions

What can a Roth IRA be rolled over into

Roth IRAs offer tax-free withdrawals of earnings during retirement; however, you may owe taxes if your withdrawal amount raises your income above certain thresholds; an accountant or tax advisor can assist in crunching these numbers.

Rollovers may be beneficial if you anticipate being in a lower tax bracket in retirement; however, the process can be complex as each transfer starts a five-year clock ticking away.

What Can I Withdraw From a Roth IRA?

When withdrawing funds from a Roth IRA, there are certain rules you must abide by in order to do so successfully. If you take out investment earnings prior to age 59 1/2, income taxes and a 10% penalty apply; otherwise if withdraw only contributions, there’s no tax or penalty applicable.

One exception may apply if distributions are used to pay for qualified first-home purchases by yourself, your spouse, your children or grandchildren. Another is if a disability prevents you from participating in work activities and necessitates tapping your savings.

If you have a disability, Roth IRA withdrawals can be taken out without penalty if two criteria are fulfilled. One is being at least 59 1/2 years old; and two applies to withdrawals of converted money as well.

What Can I Withdraw From a Roth 401(k)?

The Internal Revenue Service identifies three forms of retirement account distributions: transfers, rollovers and conversions. Transferring involves moving money between accounts at different banks while rolling over funds from one plan to another and conversion means moving funds from traditional IRA to Roth IRA accounts.

In direct rollovers, your former employer will send a check with 20% deducted for taxes. Within 60 days or the IRS may consider this an untaxed withdrawal and tax penalties may apply.

Be wary if you plan to cash out your Roth 401(k) early or withdraw funds prior to age 59 1/2; penalties and taxes could be severe. An early withdrawal penalty of 10% plus income tax on any distributions could apply.

What Can I Withdraw From a Traditional IRA?

To maintain tax- and penalty-free withdrawals from Roth IRA assets converted to traditional IRAs, the account must remain open for five years post-conversion or else it will be treated as ordinary income and subject to taxes and penalties when withdrawing funds.

But rolling Traditional IRA assets into Roth IRAs may make more sense if your expected retirement tax bracket will increase than it is now, or if contributions and withdrawals occur simultaneously – that way your money won’t be exposed to taxes until needed. However, this strategy only makes sense for people within the contribution phase-out range who cannot contribute directly to a Roth IRA directly (e.g. self-employed workers or people who hold nondeductible IRAs); otherwise a direct Roth IRA rollover might be preferable.

What Can I Withdraw From a Rollover IRA?

At some point, when withdrawing Roth IRA funds tax free is possible; however, you should first understand the five-year rule and its requirements before initiating withdrawals from your account.

If the money that was rolled over from a 401(k) into your Roth IRA has only been there for less than five years, both contributions and earnings could be subject to taxes and a 10% penalty. This applies equally.

Tax professionals and retirement advisors typically advise clients to move assets into a Roth IRA so they can grow tax-free for years, yet for some individuals this strategy may not always be appropriate; those with short time horizons may find the conversion costs outweigh its advantages due to RMDs being required at age 73 whereas Roth IRAs don’t require RMDs at that point in life.


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