Can You Convert a Rollover IRA After You Change Jobs?
If you have funds from an old employer plan that remain after leaving a job, there are various options for how you can handle them. One possibility would be rolling them over into a rollover IRA.
Reducing recordkeeping hassles by consolidating investments into one account may simplify recordkeeping, but be wary of fees, investment options and creditor protection when making decisions.
What is a rollover IRA?
Rollovers occur when funds from an employer-sponsored retirement account are transferred into a self-directed IRA (SDIRA), either electronically or by check with federal taxes withheld, though you may later reclaim this withholding. Rollovers provide great options for people wanting to preserve the investment options and tax deferral status from when their money was in an employer-sponsored plan.
Assuming your tax rate will be higher or lower in retirement, paying conversion taxes on the current amount in your traditional IRA now could help offset higher withdrawals later on. It’s essential to consult your tax advisor prior to beginning this process to understand its impact and potential outcomes. Typically, only one rollover per year can take place between traditional IRAs (and/or Roth IRAs held by same employer), or between employer-sponsored retirement accounts held with different employers and traditional IRAs held with same companies.
What are the benefits of a rollover IRA?
If you switch jobs, your employer-sponsored retirement plans (like 401(k)s) present several choices when it comes to your old savings: either cash it out and pay taxes; roll it over into another plan; or create a rollover IRA which may offer several advantages.
When rolling over your distribution, you have 60 days to deposit it directly or indirectly into an IRA. A direct rollover transfers electronically while indirect options involve trustee-to-trustee transfers between financial institutions.
If you want to convert your taxable rollover into a Roth, keep in mind that conversion taxes must be paid. Spread these out over multiple years for maximum flexibility and avoid receiving an unexpectedly large bill all at once. A financial professional can assist in running numbers and exploring different scenarios to determine what options may work best in your situation.
How do rollover IRAs work?
Rollover IRAs provide an option for taking your retirement savings out of an employer-sponsored plan and placing them into an individual IRA account, either directly or through rollover transfer – each method has different tax implications.
Transferring or converting an IRA does not count towards your annual rollover limit; however, the IRS requires you to report these transactions. Therefore, you will need to decide if and how much of your funds you wish to transfer during any year.
Direct rollovers allow you to transfer money directly from an employer-sponsored account into an IRA without making it payable or withdrawing it yourself. They must be completed within 60 days or the distribution will become taxable with a 10% penalty assessed against it. For those looking for more flexibility while accepting higher fees, indirect rollovers can also be done.
How do I convert my rollover IRA?
There are various ways you can move funds between accounts when converting. One option is direct rollover from an employer-sponsored plan like 401(k), 403(b) or government 457(b). Another possibility is switching traditional IRAs for Roth IRAs – although this will often require paying taxes on any converted amounts.
Another option would be to transfer the funds from your IRA into an employer-sponsored retirement account such as a 401(k) or SIMPLE IRA, usually incurring tax charges on conversion amounts and possibly meeting certain employment or age criteria.
Before performing a rollover or conversion, it’s wise to consult a financial professional. A savvy advisor can explain any potential tax consequences as well as potential creditor protection benefits that might apply, helping you make an informed decision based on your unique circumstances. NerdWallet writers use reliable sources like government websites, academic research and interviews with industry professionals for their articles.
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