What Can a Traditional IRA Be Rolled Into?
Traditional IRAs can be converted to Roth IRAs with reduced fees and expanded investment options, providing savers with additional ways to invest their savings.
Contributions to an IRA may be tax-deductible up to the IRS limits, currently $7,000 for savers under 50 and $8000 respectively. Upon retirement withdrawals are generally subject to income taxes unless an exception applies.
Tax-deferred growth
If your income falls into the 35 percent tax bracket now and is expected to decline during retirement, a traditional IRA could be an ideal way to save. Contributions may be deducted, and investment earnings remain tax-free until you withdraw them – though there may be contributions limits or other rules you need to be aware of before investing.
If your career spans multiple companies, you may have accrued several 401k-type plans and IRAs from different employers. Consolidating them may help streamline investment management more efficiently. Just be mindful that any withdrawal from one account to another may be subject to federal income taxes and mandatory withholding.
However, you are only eligible to roll over an IRA once each year and it is important to consider future changes to your tax rate as you pull funds forward from retirement savings and pay extra income tax than necessary.
Tax-free distributions
Typically, each 12-month period limits you to one tax-free rollover into an IRA of any kind (traditional, Roth, SIMPLE and SEP IRAs), using either the transfer method or rollover option. By opting for transfer instead of rollover you can overcome this restriction while also bypassing the 60 day withdrawal rule and decreasing the risk of making mistakes.
Typically, withdrawing money from an IRA before age 59 1/2 requires paying both ordinary income tax and a 10% penalty; however there may be exceptions such as for first-time home purchases (up to $10,000 for both you and your partner), unreimbursed medical expenses exceeding 7.5% of adjusted gross income or government-declared disaster relief expenses. You may also avoid this charge if you are either disabled veteran or have suffered domestic abuse.
Tax-free rollovers
A traditional IRA is a tax-deferred retirement account that enables you to take a tax deduction on contributions in the year of their making and withdraw them at a lower tax rate during retirement. You can roll over pre-tax accounts such as an employer-sponsored plan or SEP IRA into it or directly contribute up to annual contribution limits.
Rolling over distributions from qualified employer plans into new retirement accounts could save you income taxes and penalties as long as the transfer takes place within 60 days. To facilitate this transfer, your old plan custodian must withhold 20% from any distribution that would become taxable amount; or alternatively you could conduct a direct transfer, bypassing withdrawal processes while eliminating rollover mistakes altogether – either method will adhere to the 60-day rule; however direct transfers are generally preferred among financial professionals due to eliminating mistakes that would lead to an taxable withdrawal.
Flexibility
Traditional IRAs provide tax-deferred growth with flexible withdrawal options. But it is important to remember that any money withdrawn will be taxed as income; penalties can be avoided by taking distributions over an equal series. This option may prove particularly helpful for self-employed or between job holders.
You and your spouse can also contribute to a traditional IRA if neither has access to workplace retirement plans, such as 401(k). However, contribution limits set by the IRS limit how much can be contributed.
Traditional IRAs are among the most popular types of IRAs and often serve as repositories for rollover assets from employer-sponsored retirement accounts, like 401(k) plans. Their use has propelled recent growth within this type of account – but traditional IRAs might not be suitable for everyone; our Voya financial professionals can help determine your best investment options.
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