Rollovers can be a confusing subject. In fact, rollovers concern qualified plans, tax sheltered annuities and the five types of IRAs.
Let’s concentrate on rollovers that come from qualified plans such as 401(k).
Many people decide to rollover their retirement accounts to a traditional IRA or a Roth IRA (only if they meet the eligibility requirements for a Roth IRA). This is the most common rollover scheme. If you actually have an IRA account, the procedure is very simple.
Also, a traditional IRA may be rolled over to a Roth IRA with no penalties. In addition, if you quit your current employer and have a 401(k) or 403(b) account, these may also be rolled over to the Roth IRA. If you do not currently have an open IRA account, you will need to open one to perform any type of rollover.
What’s a Roth IRA?
The Roth IRA is an Individual Retirement Arrangement (IRA) that tolerates for a limited amount of post-tax monies to be invested tax-free during the duration of the IRA, and withdrawn after the age of 59 and a half. To be eligible for Roth IRA investing, you must be paying taxes on you income, which is fixed and involved under the compensation limits set by the tax law.
This gives some flexibility in retirement planning, as one have the option of balancing future tax increases and choose whether to defer taxes now using a 401(k) plan, or paying taxes today and using a Roth IRA to remove the future tax burden during the withdrawal period instead.
Up until 2008, moving an existing 401k account into a Roth IRA was complicated. Although there were approaches that would eventually get your money into a Roth account, the transfer was often too difficult for most people to pursue.
In 2008, politicians have provided a way to rollover a 401k directly into a Roth IRA account. So, a simple transfer is all that it takes in most situations.
The transfer of assets from your 401(k) to an IRA must be accomplished within 60 days. Otherwise, the intended rollover can be considered as a distribution. In this case a tax can be applied which can be as much as 10% penalty if you are under the age of 59 and a half.
However, life insurance is considered as the common limitation. In fact, if your qualified plan includes life insurance, it may not be rolled over because IRAs cannot invest in it.
Rollovers are not always an alternative. It depends on the specific situations concerning the inherited account and your retirement plans. If you have inherited an IRA, talk with your advisor or Estate Street Partners about your options and what’s the best solution for you.
Finally, take a deep breath and think long term about your 401(k) account. The worst thing you could do would be to make a rash emotional decision. In fact, this is about your future money, so take your time.