Money that has already accumulated in a workplace retirement plan or another IRA can still be protected from current taxation by utilizing an IRA rollover.
The use of a rollover is most common when an individual leaves an employer, but wishes to keep the retirement plan money intact in a tax-deferred account. When handled correctly, a rollover will maintain the tax-deferred integrity of your retirement plan.
Basic rules regarding rollovers
If you are moving money from an employer's plan or another IRA to a rollover IRA, here are some basic rules that apply:
- Once the money is paid out of the old plan, and paid to you directly,
you have 60 days to move the full amount to the IRA to avoid taxes and
withdrawal penalties (if applicable).
- A 20% automatic tax withholding applies to the rollover if the payout from the old plan goes directly to you before you roll the money into the new IRA. Therefore, make sure the rollover goes directly from the custodian of your old plan to your IRA custodian. When handled in that way, the automatic withholding provision does not apply.
- If you think you might want to eventually move the money in the rollover IRA to another employer's plan, be sure to keep it separate from other IRA dollars. Establish this "conduit IRA" as its own account.
- Be sure only pre-tax contributions from a workplace retirement plan are moved into the IRA. Any assets attributable to after-tax contributions at work must be invested separately.
Rolling to a Roth IRA
In a typical rollover to a Traditional IRA, the assets continue to grow on a tax deferred basis, but are taxed upon withdrawal.
You may be able to choose to roll the assets into a Roth IRA. In that case, the money can grow tax-deferred, with future withdrawals potentially available on a tax-free basis. However, there are some points to remember:
- When rolling assets to a Roth IRA, taxes will be due currently on the value of earnings and pre-tax contributions in the account. This creates a current tax burden for you and could reduce the value of your retirement plan.
- To qualify for a Roth IRA rollover, your Adjusted Gross Income in the year the rollover occurs cannot exceed $100,000 (for either a single person or married couple filing a joint tax return).
There are other issues to consider as well. For instance, if you need to withdraw the money within five years, the tax-free feature of a Roth IRA does not apply. You'll need to carefully consider whether the opportunity is right for you to make a rollover into a Roth IRA.
Start on your path today
To take a step towards a comfortable retirement, please contact your Protective representative today.
