What Can a Roth IRA Be Rolled Over Into?

If your tax rate will increase significantly upon retirement, converting funds to Roth accounts might make sense – although the rules surrounding their conversion can be complex.

Under the wrong hands, a rollover could become a hidden tax bill. Consulting a qualified financial professional is key when planning such transactions.

Tax-Free Withdrawals

Roth IRA earnings can be withdrawn tax free after five years or if their owner meets specific eligibility requirements (i.e. they’re over 59.5). This is an advantage over traditional retirement accounts where any withdrawal must first come out of principal and taxed as income.

However, to take full advantage of this feature it’s essential to be mindful that Roth IRA limits are adjusted annually and your contribution amount depends on your income. A sudden surge in taxable income could trigger one-time taxes such as 3.8% net investment income tax or Medicare surtax – so to reduce tax liabilities it may be beneficial to stagger conversions over a number of years by setting up either direct rollovers or transfers from previous employer plans – either method requires you to receive explicit instructions from the new IRA provider as to how checks should be written out and what information needs to be included on checks containing.

Taxes on Withdrawals

Roth IRA funds may be distributed tax-free if used to cover qualified expenses, although withdrawals prior to age 59 1/2 may incur penalties and income taxes. Rollovers also can trigger income taxes as well as early withdrawal penalties.

To avoid tax liabilities, the best method for rolling over is direct rollover; whereby, your source account provider sends directly a check to your new IRA provider. This also removes the risk that you could accidentally miss a 60-day deadline.

But this option exposes you to additional taxes and penalties not present with direct rollover. For instance, many source accounts require 20% of each distribution be withheld for taxes; any withholdings not returned within 60 days will incur further income taxes and penalties. You must also pay ordinary income tax on investment earnings withdrawn before meeting the five-year rule; though you may be exempt if permanently disabled, inheriting after death of account owner or making first home purchase are eligible exemptions from this penalty.

Distributions for Non-Qualified Expenses

Many individuals convert their retirement assets to Roth IRAs as it may save them taxes in the future, but it’s important to pay attention to when doing this conversion. In general, you can withdraw contributions but not earnings without incurring income tax or penalties – which could prove useful if an individual anticipates being subject to higher tax brackets in future.

Roth IRA earnings and converted funds must remain within your account for at least five years before withdrawals can occur. Otherwise, you could incur income taxes and a 10% penalty upon withdrawing them early.

Consider all sources of income you will have during retirement. A sudden surge in taxable income could trigger one-time taxes such as the 3.8% net investment income tax or Medicare surtax; it might therefore be wiser to convert over several years rather than in one go.

Distributions for Qualified Higher Education Expenses

Though using retirement savings for educational expenses may not always be recommended, some families may benefit from using a Roth account for educational costs. Withdrawals made without penalty don’t count towards student aid index (SAI) calculations used to determine financial aid eligibility; keeping asset control with parents.

Withdrawals may include tuition, fees, books, supplies and equipment essential to enrollment or attendance. Room and board costs can be deducted if enrolled half time; other educational expenses (such as sports or games ) do not qualify. Prior to making any Roth conversion decisions, an in-depth analysis should be undertaken of your tax situation; speaking with one of Thrivent Financial’s advisors can assist with making wise choices tailored specifically for you and your unique circumstances.


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