What Can a Traditional IRA Be rolled Into?

Traditional IRAs provide several benefits. You can deduct your contributions and potentially defer paying taxes on investment earnings until it comes time to withdraw them in retirement.

When rolling over money from a workplace retirement plan, you have two IRA options open to you – traditional or Roth. No matter which you select, annual contribution limits and required minimum distribution rules must be observed.

Tax-Deferred Growth

Traditional IRAs allow investors to invest tax-deferred through tax-deductible contributions. Gains aren’t subject to taxes until retirement is reached. This may help those in lower tax brackets save more for later life.

Withdrawals from an IRA are taxed similarly to investments or savings accounts, while early withdrawals are subject to penalties. This should be taken into account if your tax bracket increases after retirement than it does now.

Individuals employed can contribute up to their annual earnings to a Traditional IRA with a maximum contribution limit of $6,500 or $7,500 for individuals age 50 and over. Furthermore, you can roll over funds from employer-sponsored plans (like 401(k)s) into traditional IRAs; however only once every 12 months.

Withdrawals

Traditional IRA savings grow tax-deferred until withdrawals in retirement. Any funds taken out prior to age 59.5 could incur income taxes and an early withdrawal penalty of 10%, unless used to cover certain eligible expenses.

Your annual required minimum distributions, or RMDs, from your IRA are due once you reach age 73 (for those born between 1950 and 1985). The IRS calculates this figure using a formula which accounts for your nondeductible contributions resulting in an RMD that is both tax-free and taxed accordingly.

Roll over any distribution within 60 days after receiving it into an IRA to avoid incurring a 10% penalty, either through direct rollover or transfer. A transfer may be more convenient, but doesn’t bypass the 60-day requirement and may commingle funds from both sources simultaneously.

Required Minimum Distributions

As soon as you reach age 72 or 73, the IRS requires that you begin withdrawing required minimum distributions (RMDs). The exact amount will change annually and is based on your life expectancy; they have made this easy with their RMD worksheet.

RMDs and any money taken out of an employer-sponsored plan like a 401(k) or 403(b) is subject to income taxes; however, if you roll those funds over into a traditional IRA instead, they’ll remain protected from income tax for life.

Indirect rollovers may not be as tax-efficient as direct transfers because the administrator of your old plan liquidates your holdings and sends a check with the proceeds, leaving you 60 days to deposit this money into your new IRA or face income taxes and an early withdrawal penalty of 10%. As an alternative option, qualified charitable distribution (QCD) could help keep this money out of your adjusted gross income entirely.

Rollovers

Rollovers are the process of moving funds from an employer-sponsored retirement account (such as a 401(k), such as an employer pension plan), into a traditional IRA. A direct rollover involves having funds sent directly from one plan custodian to the other – eliminating income taxes or any early withdrawal penalty fees that might otherwise apply to you and giving the funds an uncomplicated path towards reaching their final destination.

Rollovers are often the preferred means of transferring funds after changing jobs, as they allow you to preserve tax-deferred status while consolidating investments. Just make sure that any rollover is completed within 60 days in order to avoid additional taxes or penalties.

Another consideration is that you are limited to doing one rollover per year for individual assets – not accounts; SEP and SIMPLE IRAs count towards this limit as well.


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