What Can a Roth IRA Be Rollover Into?
Retirement savings options come with their own set of advantages and drawbacks; choosing the appropriate option could mean the difference between having an enjoyable retirement or not.
When it comes to IRAs, there are three primary options for you: rollover, contribution and conversion. Each has different tax implications depending on the circumstances surrounding their adoption.
What can I roll over into a Roth IRA?
Rollover assets from an existing or new Roth IRA into another, but you must understand the five-year holding period and other rules applicable for such transfers.
Specifically, when you convert funds from an IRA into a Roth, income tax must be withheld from this conversion in its year of occurrence and you must also be under 59 1/2 to avoid an early distribution penalty. Furthermore, any nondeductible contributions made will have to be reported pro rata when declaring your taxable income.
Managed correctly, managing rollovers can be a complicated endeavor. Between discussing income tax ramifications with your advisor and making sure IRA contributions don’t go beyond contribution limits, doing this correctly requires careful attention to every detail. Thankfully, there are online tools that make the process simpler.
Traditional IRAs
If you have several IRA accounts from previous employers or personal contributions to a traditional IRA, consolidating them all into one can simplify management and tax recordkeeping. This move, known as a transfer, can often be completed without incurring taxes – provided the money doesn’t return into an pre-tax account such as 401(k), 403(b), or 457(b).
An indirect rollover involves taking a distribution from your old plan and depositing it directly into a new IRA within 60 days, however this process can become complex as your former employer typically withholds 20% to cover income tax liability – meaning you’ll either need to come up with this money yourself or face an early withdrawal penalty of 10% early withdrawal penalty – plus, should this deadline pass, any distribution will become taxable and subject to penalties; that is why direct rollover is usually preferable when possible.
Roth IRAs
Roth IRA rollovers fall into three main categories: direct, indirect and conversion. Of these options, direct rolls offer the least complexity as funds move directly between Roth accounts; indirect rollovers involve moving money from one traditional retirement account into a Roth and may involve tax consequences that arise once involved by the IRS.
Traditional rules dictated that you could only roll over distributions from non-Roth IRAs into Roth accounts by first rolling them into an ordinary IRA first, but since June 2016, direct rollover from employer retirement plans into a Roth is possible.
Direct transfers involve moving funds directly from one IRA into another IRA without incurring taxes withheld; this may be done tax-free; however, before undertaking a Roth conversion it’s wise to consult a financial advisor in regards to its potential income tax implications; especially if your retirement tax bracket will likely increase.
Self-Directed IRAs
Self-directed Individual Retirement Accounts (SDIRAs) allow investors to diversify their investment portfolio with alternative assets like real estate and gold. Unlike traditional IRAs, which only permit the IRS-approved investments, SDIRAs allow more flexible investing choices that don’t restrict you.
Roth conversion occurs when funds from tax-deferred accounts like traditional IRAs or employer sponsored plans are transferred into Roth IRAs – this process requires paying taxes on what has been converted, since Roth accounts are funded with after-tax dollars while traditional accounts contain pre-tax funds.
When rolling over your employer-sponsored plan into an SDIRA, it is crucial that a reliable and experienced SDIRA custodian be selected. They should have in-depth knowledge about all investments eligible for rollover into an SDIRA as well as an established track record assisting clients with self-directed investing. Furthermore, an ideal custodian would offer low setup and annual fees.
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