What Can a Traditional IRA Be Rolled Into?
A traditional IRA is an individual retirement account that provides tax-deferred growth. Furthermore, this type of IRA entitles its contributors to receive a tax deduction on contributions made.
An IRA rollover can be an efficient and straightforward method for moving funds from one retirement account to the next. But it’s essential that you understand all the rules surrounding an IRA rollover; otherwise, failure could incur income taxes and penalties.
Tax-deferred
Most employer-sponsored retirement plans provide penalty-free early withdrawals if you’re under age 55; whereas, withdrawing these funds from an IRA or non-qualified account requires payment of ordinary taxes as well as potentially forfeiture of tax-deferred growth potential.
To avoid this problem, the ideal strategy would be to invest your distribution within 60 days in an IRA or qualified plan; however, the IRS requires 20% of your taxable portion be withheld for income taxes.
An IRA rollover can bring numerous advantages, from lower fees and more investment options to enhanced creditor protection and helping you reach long-term goals more quickly. You have several IRA options available to you such as traditional or Roth IRAs; even low-cost investment management robo advisors might work. It is crucial that before making a decision you understand its federal income tax implications; Voya Financial Advisors has all of the forms and information available for your decision process.
Tax-free
When switching jobs, your employer-sponsored retirement accounts, such as 401ks, 403bs and 457s can typically be converted to individual retirement accounts (IRAs) without incurring taxes – providing tax-deferred investment growth until you withdraw the money from said accounts.
Indirect rollovers don’t trigger current income taxes; however, withdrawals before age 59 1/2 incur a 10% early withdrawal penalty. You can make withdrawals exempt from this fee in certain situations such as paying unreimbursed medical expenses, buying your first home or qualifying higher education expenses.
Rolling multiple accounts together into an Individual Retirement Account can help simplify your recordkeeping and make tracking your savings simpler. IRAs offer more investment choices than employer-sponsored retirement plans at lower costs, as well as low-cost automated investment management services known as Robo-advisors that charge less than 0.5% of assets to manage them on your behalf. Unfortunately, however, IRAs provide less protection against creditors than employer-sponsored retirement plans do.
Roth
IRAs can be powerful investment tools, but you must exercise caution when rolling over your retirement account. Failure to follow IRS requirements could incur taxes and penalties; funds must be rolled over within 60 days after receipt, with only one allowed each year. When moving funds between different types of IRAs, use trustee-to-trustee transfers instead to save both taxes and fees.
Direct rollovers require that your old plan send you a check with 20% withheld for taxes; you should deposit this directly into an IRA within 60 days to avoid taxes on pretax contributions and earnings, plus any applicable 10% penalties (unless under age 59 1/2 ). However, indirect rollovers involve multiple accounts, which may cause complex tax implications; as per IRS rules this type of rollover should only occur once per year for non-tax deferred accounts such as SIMPLE and SEP IRAs.
Inherited
After an IRA account owner passes away, his or her beneficiaries must start taking annual required minimum distributions (RMDs), to ensure that investments do not continue growing tax-deferred forever. This requirement applies specifically to Traditional IRAs inherited by them.
Assuming control of a retirement plan presents complex questions for beneficiaries. Such considerations could include whether to minimize taxes or maximize cash distributions – among many other considerations that could impact their decision. Moreover, recent changes in law and IRS interpretation of said changes has further complicated matters.
There are various strategies available to reduce the impact of RMDs and withdrawal penalties associated with an inheritance IRA, including rolling it over into a personal, like-kind IRA at another financial institution – this process can be accomplished directly via direct transfer from one account to the other via Voya’s retirement professionals who will assist in reviewing all available options to you as well as their federal income tax implications.
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