What Cannot Be Rolled Over Into an IRA?
People opt to roll over their IRAs into new accounts for various reasons, including changing jobs or seeking higher returns and greater investment options. While the rules surrounding the process can be complex and time consuming, there are ways to prevent costly errors from being made along the way.
Direct transfers, wherein distributions are sent directly from one retirement account to another IRA provider, are the ideal method. Rollovers expose you to additional taxes and penalties that might occur.
What Can’t Be Rolled Over?
Even though rolling over retirement assets can make investing simpler, it is essential that you avoid making certain mistakes. Without careful management you risk forfeiting compound interest as well as incurring tax penalties.
As an example, it is not recommended that distributions from traditional employer-sponsored plans be rolled over before taking their required minimum distribution for that year; otherwise you will incur both an early withdrawal penalty of 10% as well as income tax liability on what was withdrew.
As with Roth IRAs, no direct transfers of IRA funds can be done before taking your RMD for the year – this applies to any and all IRAs including Roth. Instead, trustee-to-trustee transfers can help remove this risk; you should request this from either your plan administrator or custodian.
An important consideration for those holding company stock in their 401(k) plan is how that investment will be taxed after they leave their employer. When converted to an IRA, that stock gets taxed at ordinary income rates even though its taxes were deferred through its original plan.
Transferring shares directly to a brokerage account allows you to sell them immediately upon transfer, with only capital gains taxes due on their NUA being payable compared with income tax rates applicable if moving them into an IRA. This could prove more tax efficient.
Financial professionals can assist in evaluating whether holding stocks outside an IRA could be more advantageous. Furthermore, they will explain any additional costs an IRA might entail.
Many IRA promotional materials emphasize how an IRA is ideal for moving money out of an employer-sponsored retirement plan and into your 401k, 403b or 457 plan accounts; however, traditional IRAs also accept transfers or direct rollovers from eligible employee plans and traditional 401k, 403b and 457 plans as direct rollovers tax-deferred funds into them.
Contrary to employer plans, IRAs generally offer a wider array of fixed income products from global bond funds to certificates of deposit. When selecting your best option for your portfolio based on investment goals, risk tolerance, and time horizon considerations, consider your IRA carefully before making your selection.
Additionally, IRAs often boast lower account and investment fees than most 401(k) plans, providing long-term savings. Furthermore, an IRA also gives you the flexibility of managing or rebalancing your investments yourself – either on your own or professionally managed.
Money Market Accounts
Many investors incorporate a retirement money market account as part of their portfolio strategy, holding onto some portion of their assets for security and growth. Although interest rates may be relatively low in comparison with traditional bank savings accounts, FDIC coverage up to $250,000 provides added protection – plus they allow check writing privileges!
Law discourages the ownership of collectibles within an IRA, though exceptions exist for highly refined bullion and gold coins. Real estate cannot be held inside an IRA and most custodians do not allow direct ownership of oil and gas interests.
Financial professionals may earn commissions when they recommend an IRA rollover, so be aware of any possible conflicts of interest. A good custodian should be open and transparent with you about any conflicts of interest as well as how much time remains before the 60-day rollover deadline (this won’t change if it falls on a weekend, holiday, or legal holiday).
CPAs must take great caution in recommending investments for individual retirement accounts (IRAs), due to the stringent rules and penalties related to prohibited transactions in qualified retirement plans. IRAs tend to receive less scrutiny than pension plan assets.
Consider investing in low-fee mutual funds and ETFs that align with your asset allocation and risk tolerance, or opt for hands-free options like robo-advisors that utilize computer algorithms to automatically select and rebalance your portfolio.
Don’t give in to the temptation of purchasing gold bullion or precious metals with your IRA; such investments would likely qualify as unrelated business taxable income (UBTI). Instead, invest in real estate with an authorized custodian who won’t treat your property as passive activity property.
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