Can You Convert a Rollover IRA?
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Rollover IRAs are established when you move assets from another retirement plan into one that meets IRA criteria, typically one belonging to your former employer’s plan. They offer greater investment options and simplify managing savings over the long run.
Direct rollovers
Direct rollover is the practice of moving assets from your previous employer’s retirement plan into an IRA at another financial institution. Transferring involves two accounts that have similar features (for instance, moving money from one traditional IRA into another traditional IRA). On the other hand, rolling over involves moving money between types of accounts (transferring from 401(k) into an IRA or rolling assets from 401(k) into Roth IRA).
One key point about direct rollover is that it never puts funds in your possession; rather, your employer’s plan administrator sends them directly to your new IRA custodian – this method usually preferred as it eliminates tax distributions or potential penalties for you.
Your choice of IRA will ultimately decide whether a direct rollover is possible. Traditional IRAs provide access to a range of securities such as stocks, mutual funds and exchange-traded funds (ETFs). However, if your old employer plan contains investments such as real estate or precious metals then direct rollover may not be an option.
People opt for direct rollovers for various reasons. Perhaps they wish to consolidate assets from various employer-sponsored plans into one IRA, or have changed jobs and no longer wish to pay any early withdrawal penalties. A rollover may also be helpful when planning on retiring with non-qualified employer plans such as 403(b)s or 457(bs), which do not usually offer as many investing choices as an IRA does.
Indirect Rollovers
An indirect rollover differs from its direct counterpart in that you must first take possession of the funds before depositing them into your IRA. Your new employer’s plan administrator should issue you a check with the amount due and you must deposit that money within 60 days to avoid taxation or financial penalties.
Failing to comply with the 60-day limit on an indirect rollover will lead to a taxable distribution and could incur significant taxes and penalties, especially if you’re under 59.5. Depending on the type of IRA and income level, early withdrawal penalties of 10% could apply or ordinary income taxes on money withdrawn – though you could potentially recharacterize an indirect rollover as direct by filing a written request with the IRS within 60 days from your original withdrawal – however it would be prudent to consult a financial professional or tax advisor prior to making such a move.
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