IRA Rollovers & Conversions
Explore your options when moving your investments
Like many Americans, you may be saving for retirement in a variety of accounts at a number of different financial firms. You may be contributing to a 401(k) or 403(b) at work, have a Traditional IRA at one firm, and a Roth IRA at another. Consolidating all of your accounts at one firm and with one advisor can make investing and managing your assets much easier. And, when you are ready to do a rollover from your employer plan or to convert Traditional IRA assets to a Roth IRA, your advisor will be ready to help you with the complicated steps.
Rollover IRAs
What is a Rollover IRA?
A Rollover IRA is a Traditional IRA that is established and funded with your
former employer plan assets. When you leave an employer, you are entitled to
the money that has been accumulating in a 401(k), 403(b), SEP-IRA, SIMPLE-IRA,
etc.
employer's 401(k) plan. Rolling your distribution over into an IRA gives you
distinct advantages, including:
If you take it directly, you will lose 20% right away to pre-pay taxes, plus you could lose another 10% if you are under age 59 1/2.
A better option is generally to work with your advisor to roll over the entire balance to a Rollover IRA, keeping the full amount in tact and retaining tax-deferred earnings growth. You will have:
- More investment choices
- More control over the assets
- More flexibility to decide when to access these assets
Who should consider a Rollover IRA?
If you change companies or retire, the 401(k) distribution you receive may
become your primary source of income.
It's tempting to take your distribution in cash, but you could lose a
significant amount to taxes and penalties.
Rolling these funds directly into an IRA — maintaining your tax-deferred
earnings compounding — may be a wiser
choice for the long-term.
IRA conversions
What is an IRA conversion?
A conversion is the term used when you want to change the assets in a Traditional IRA to a tax-free Roth IRA. The process requires paperwork to inform the financial firm of your request, and to set up a new Roth IRA if you do not have one. This is also a taxable event – you will owe taxes the year in which you make a conversion. However, after meeting certain eligibility requirements, you will be able to take assets from the Roth IRA completely tax free.
Should you convert your assets?
Conversion isn't for everyone. However, converting to a Roth IRA may be right for you if you meet the following guidelines:
- Investment length — You intend to leave your money in your IRA as long as possible, particularly if you plan to pass your IRA on to your heirs. Note that funds must remain in a Roth IRA for 5 years, and you must reach the age of 59½ to be eligible.
- Income — Your adjusted gross income is less than $100,000 in 2008 or 2009. In 2010, the income cap will be lifted, and most all IRA owners will be eligible to convert to a Roth IRA.
- Ability to pay — You can afford to pay the taxes due on the IRA when you convert.
- Taxes — The increase in adjusted gross income from the conversion would not adversely affect your tax rate. Contact a tax professional or lawyer to find out more about possible tax consequences and whether or not converting is advisable in your individual situation.
Next Steps
- Find any former employer retirement plans and roll them to a Rollover IRA
- Talk to your advisor about the advantages of converting some or all of your Traditional IRA to a Roth IRA
- Complete any necessary paperwork with your advisor to open accounts and to move assets