A Rollover Individual Retirement Account (IRA) is a personal account that allows you to move employer sponsored plans like 401(k), 403(b), and 457 plan monies into it.[1] Though it has many of the same features that a Traditional IRA has; there are a couple of key differences:
- Some employer sponsored plans only accept money from another employer sponsored plan. A Rollover IRA would be the way to go if you wanted to have a personal account that could always be converted into an employer plan. You might not immediately work for an employer who has an employer sponsored plan after you have left a job, but you could still want control of your retirement account, pay fewer fees which IRAs tend to have, and have more investment choices. A Rollover IRA can be a holding account for these assets that could always be converted into an employer plan. [2]
- Employer Sponsored Accounts are not able to be touched by creditors. Accounts like 401(k), 403(b), and 457 have unlimited creditor protection, while Traditional IRAs only have protection up to $1,512,350 between April 1, 2022, and March 31, 2025. Rollover IRAs also have unlimited protection. 2,[3]
Key aspects of Rollover IRAs:
- They are a pre-tax investment account.[4]
- With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.[5]
- In 2023, the yearly contribution limits for non-rollover money are $6,500 per year for those under 50. People 50 and older can make an additional $1,000 catch-up contribution. You can choose to add personal money to these accounts, but it might affect how it can be rolled into a new employer plan. 2,[6]
- Investment options are almost anything- individual stocks, mutual funds, ETFs, annuities, UITs, etc. There are investment vehicles that are not allowed in IRAs, including Life Insurance, types of Derivatives Positions, antiques/collectibles, personal real estate, and most coins. [7]
- Fees vary from institution to institution. It is crucial to understand how much you are paying in fees.
- Investment control is either by your chosen institution or advisor or can be self-directed. With this type of account, you must know your risk tolerance and diversification strategy. These are especially important if you are self-directed and need to make changes to your investments as you make changes to your life and risk tolerance.[8]
- The earliest you can take penalty-free withdrawals is 59 ½. However, there are some exemptions to the early withdrawal penalty- if you are permanently and totally disabled, if you have medical expenses that exceed 10% of your modified adjusted gross income, the cost for your medical insurance while you’re unemployed, your qualified higher education expenses, the amount to buy, build or rebuild a first home (up to $10,000), your withdrawal is in the form of an annuity, your withdrawal is a qualified reservist distribution, you’re the beneficiary of a deceased IRA owner or the withdrawal is the result of an IRS levy.[9]
- Required Minimum Distributions (RDMs) need to start April 1 of the year following the calendar year in which you reach age 70½ if you were born before July 1, 1949, or April 1 of the year following the calendar year in which you reach age 72, if you were born after June 30, 1949. RMDs are required even if you are still working.[10]
- You can convert funds from a Rollover IRA to a Traditional IRA because it is essentially a Traditional Account to begin with, reasonably easily. You can convert these funds to a Roth IRA, but you will owe taxes on the converted money, but the funds will not be taxed at distribution, and Roth IRAs don’t have RMDs.[11],[12]
- If you have a Rollover IRA, Traditional IRA, and a Roth IRA, your contribution limits between the three are $6,500 per year for those under age 50 and $7,500 for people 50 and older.
- There are no income limits to open and contribute to a Rollover IRA.[13]
- But there are deduction income limits for individuals and spouses who also have an Employer Sponsored Retirement Plan at work, i.e., 401(k) plans, 403(b) plans, 457(b) plans, and also an IRA. In 2023, Single or head-of-household filers get a full deduction if their modified adjusted gross income (MAGI) of $73,000 or lower, a partial deduction for a MAGI between $73,000-$83,000, and no deduction for a MAGI above $83,000. For joint filers with each spouse having their own employer sponsored retirement plan, they get a full deduction for a joint MAGI of $116,000 or less, partial deduction for a joint MAGI between $116,000 -$136,000, and no deduction for a joint MAGI above $136,000. For joint filers where only one spouse has an employer sponsored retirement plan, they get a full deduction for a joint MAGI of $218,000 or less, partial deduction for a joint MAGI between $218,000 -$228,000, and no deduction for a joint MAGI above $218,000.[14],3,[15],[16]
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Sources:
[1] https://www.sofi.com/learn/content/rollover-ira-vs-traditional-ira/
[2] https://obliviousinvestor.com/what-is-a-rollover-ira/
[3] https://www.investopedia.com/ask/answers/081915/my-ira-protected-bankruptcy.asp
[4] https://www.nerdwallet.com/article/investing/ira/what-is-a-traditional-ira
[5] https://www.investor.gov/sites/investorgov/files/2019-02/Saving-and-Investing.pdf
[6] https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500#:~:text=Highlights%20of%20changes%20for%202023,to%20%246%2C500%2C%20up%20from%20%246%2C000.
[7] https://www.investopedia.com/articles/retirement/11/impermissable-retirement-investments.asp
[8] https://www.nerdwallet.com/article/investing/ira/what-is-a-traditional-ira
[9] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
[10] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
[11] https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
[12] https://www.investopedia.com/roth-ira-conversion-rules-4770480
[13] https://www.investopedia.com/ask/answers/03/081503.asp
[14] https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500#:~:text=Highlights%20of%20changes%20for%202023,to%20%246%2C500%2C%20up%20from%20%246%2C000.
[15] https://www.irs.gov/retirement-plans/2021-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
[16] https://www.irs.gov/newsroom/irs-announces-changes-to-retirement-plans-for-2022
Advisory services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor. This material has been prepared for informational purposes.