What Can a Traditional IRA Be Rolled Into?
Traditional IRAs can be an ideal retirement savings choice if you qualify for tax deductions and want your investments to grow tax-deferred. Eligibility depends on factors like income, filing status and workplace retirement plans coverage.
Traditional IRAs provide several key advantages. Their contributions qualify for tax deductions while withdrawals in retirement are taxed as regular income. But there are other considerations.
What Can I Withdraw From My Traditional IRA?
Taxes typically don’t apply to individual IRA contributions or earnings until withdrawal from their accounts; however, traditional IRA owners should keep in mind that withdrawals before age 59 1/2 could trigger income taxes and an early withdrawal penalty of 10% of withdrawal amount.
Roll over funds within 60 days into another traditional or Roth IRA to avoid penalties; however, one such rollover per year is permitted.
Furthermore, RMDs must begin being taken from your IRA by April 1 of the year following your 70th birthday or, if born before 2020, 72nd birthday. Failing to do so results in a 50% penalty on what should have been distributed – although these penalties don’t apply if money is taken out for first home purchases or education expenses.
What Can I Withdraw From My Roth IRA?
The IRS allows you to withdraw funds from your IRA without penalty or taxation as long as they are used for qualified higher education expenses, such as tuition fees, supplies, books and equipment for yourself, your spouse or children.
Assuming you meet one of the IRS-approved exceptions, generally any amount taken out of an IRA is taxed as ordinary income and you must begin taking minimum required distributions by age 72 (or earlier if your company sponsored retirement account) (assuming you didn’t renounce working there for some reason).
Convert any portion of your traditional IRA that contains earnings and contributions into a Roth IRA, although you must pay taxes on any taxable conversions due to income tax paid on pretax contributions made into it when they were first made. You can opt to replace withholding with an indirect rollover within 60 days if you would rather avoid having to pay tax on conversion.
What Can I Withdraw From My SEP IRA?
A SEP IRA is similar to a regular IRA but designed specifically for small-business owners and freelancers who make contributions from both their employer and sometimes employees. Like with traditional IRAs, contributions grow tax-deferred until withdrawal is made; any income taxes due upon withdrawal remain untaxed until then.
IRS requirements dictate that participants in SEP IRAs begin taking required minimum distributions (RMD) by age 72; otherwise they risk incurring a 10% penalty on withdrawal amount.
SEP IRAs differ from 401(k) plans in that they don’t allow participants to make loans against them, however if they withdraw money before age 59 1/2 it will be subject to income taxes and an additional 10% penalty tax.
What Can I Withdraw From My SIMPLE IRA?
Employees contribute to their SIMPLE IRA through pretax deductions from their paycheck, and employers typically match these contributions dollar for dollar up to 3% of an employee’s salary.
As with other retirement accounts, the money in a SIMPLE IRA grows tax-deferred until withdrawals are made in retirement and is then usually taxable unless the account owner falls into a lower tax bracket than they were at employment termination date or age 59 1/2.
Employees withdrawing funds from a SIMPLE IRA within two years or before reaching age 59 1/2 will incur both the standard 10 percent penalty and an extra 25 percent early withdrawal tax. To avoid this tax burden, employees can roll over funds into another traditional or Roth IRA by following the one-IRA-rollover-per-year rule; similar restrictions also apply when rolling money from a SIMPLE IRA into employer sponsored plans like 401(k). SEP IRAs don’t fall under this restriction.