Rollover IRA

What is an IRA rollover?

An IRA (individual retirement account) rollover is a transfer of assets from an existing employer-sponsored retirement plan or IRA to another IRA. This consolidation can help you achieve your asset allocation goals and provide you with access to a broad range of investments, all while maintaining the federally tax-deferred growth potential of your retirement assets.

When should you consider rolling over assets to an IRA?

What are the potential benefits of an IRA rollover?

Achieve a comprehensive asset allocation policy

Consolidating all your retirement accounts into an IRA can help you achieve a comprehensive asset allocation policy for your entire portfolio, taking into consideration your goals and risk tolerance.

Access a full range of investment choices

An IRA can give you access to a much broader range of investments — including standard mutual funds, stocks, bonds, annuities and special investments — than are usually not available through employer plans.

Keep the advantages of tax deferral

The assets you roll over have the potential to grow federally tax-deferred in your IRA.¹ You will not pay taxes on those assets until they are withdrawn. Many investors may be in a lower tax bracket when they withdraw their assets (usually in retirement) than when they made their contributions. Earnings and deductible contributions are taxed as ordinary income without additional penalties if withdrawals are made after age 59½.

Access your funds more conveniently

Consolidating your retirement accounts can help you achieve a comprehensive asset allocation strategy and provide you with more convenient access to those assets. Remember that you still must take required minimum distributions (RMDs) from your IRA after reaching age 70½.² An RMD is the minimum amount of funds you must begin taking annually from your qualified retirement plan(s) after reaching age 70½. You can make withdrawals from an IRA at any time. Withdrawals are taxed as ordinary income and are subject to a 10% penalty tax, unless you are age 59½ or older unless the following exceptions apply: qualified higher education expenses; qualified first home purchase (lifetime limit of $10,000); certain major medical expenses; certain long-term unemployment expenses; disability; or substantially equal periodic payments.

Streamline account management

Consolidating your retirement plan assets into an IRA makes it easier to manage and track the progress of this important retirement savings account.

Control beneficiary designations

Your IRA is part of your taxable estate, and beneficiary designations should be part of an effective estate-planning strategy. With an IRA, you have the flexibility to name any beneficiary — including a spouse, child, friend, domestic partner, trust or charity — thus creating an efficient vehicle for wealth transfer according to your wishes.

When your beneficiaries inherit your IRA, they may have to pay significant income taxes as they receive distributions. A stretch IRA is a distribution strategy that allows spousal and nonspousal beneficiaries to avoid immediate taxation of your IRA and continue the tax-deferred accumulation of the IRA's assets.

For example, to implement the strategy, you'd name your spouse, or possibly some younger person (child or grandchild), as the beneficiary of the IRA. During your lifetime, you'd try to limit your distributions from the account to the required minimum in order to preserve as much of the IRA's assets as feasible. Upon your death, your beneficiary would inherit your IRA, name his or her own beneficiary and also stretch out withdrawals over his or her life expectancy. The success of the strategy is contingent largely on you and your beneficiary's limiting distributions to the required minimum so as to maintain the tax-deferred growth potential of the assets for as long as possible. Implementing a stretch IRA strategy can be complicated. That's why it's best to consult your tax advisor, attorney and Financial Advisor to assist you in determining whether the stretch IRA strategy can help you enhance your retirement and estate plans.

What IRA rollover options are available?

Consider converting to a Roth IRA

Withdrawals of contributions from a Roth IRA are not subject to federal income tax. Withdrawals of earnings from a Roth IRA are not subject to federal income tax, provided that the withdrawals are taken at least five years after you establish a Roth IRA and you are age 59½ or older, or you meet another exception³. Therefore, a Roth IRA offers the potential for tax-deferred earnings growth and potentially tax-free withdrawals in retirement. Unlike a Traditional IRA, a Roth IRA does not require you to take RMDs at age 70½⁴. Therefore, earnings have the potential to compound tax-free in your Roth IRA and then be passed to your beneficiaries income-tax-free.

When you convert to a Roth IRA, income taxes will be owed on the taxable portion of the distribution. To maximize the benefits of conversion, the money to pay those taxes should come from a source outside the Traditional IRA you are converting. You may convert your Traditional IRA over several years in order to limit the income tax liability in any one year.

Consider converting to a Roth IRA directly from an employer retirement plan

The Pension Protection Act of 2006 significantly expanded access to Roth IRA conversions beyond rollovers of Traditional IRAs. You are now able to roll over assets from qualified employer-sponsored retirement plans, 403(b) plans and 457(b) plans directly to a Roth IRA. You no longer have to first roll over those assets to a Traditional IRA and then convert the traditional IRA to a Roth IRA. This change took effect Jan. 1, 2008. These rollovers are considered conversions and are subject to the same rules as a conversion from a Traditional IRA.

Consider rolling over to a Roth IRA from a Roth 401(k) or a Roth 403(b)

Funds directly rolled over from a Roth 401(k) or a Roth 403(b) to a Roth IRA are available for distribution tax-free once you meet the five-year participation rule.³