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What is the Difference Between an Account Rollover and a Transfer?

An important financial planning activity is reviewing your financial plan to ensure that everything is on track to help you meet your financial goals. Life changes, market shifts, and any number of factors can cause plans to change.

One common change that investors make during their financial journeys is to move funds from one retirement account to another. Whether this move occurs for tax purposes, because of a change in employment, or for another reason, it’s important to consider how this change will be made: as a rollover or transfer.

Of course, if your situation involves moving retirement accounts from your former employer, you have a variety of options from which to choose. These include:

  • Leave the money in your former employer’s plan, if permitted
  • Roll over the assets to your new employer’s plan, if one is available and rollovers are permitted
  • Roll over to an IRA
  • Cash out the account value

 

Because of this, it’s important to understand the differences between transfers and rollovers, as well as the benefits and drawbacks of each. Today we’re going to explore these options to help you get a better understanding of how a rollover or transfer could impact your financial planning activities.

What is a Transfer?

A transfer involves transferring funds from one account to another. Generally, transfers move from one account of the same type to another, such as moving funds from a 401(k) plan at a previous employer to a 401(k) plan offered by your current employer.

More commonly, transfers are used to move funds from one IRA to another, since you can move funds between accounts without incurring a tax penalty. However, if you need to move funds from a Traditional IRA to a Roth IRA, you must perform a Roth conversion, and make the necessary adjustments when you file.

 

What is a Rollover?

A rollover occurs when you move funds from one type of account to another, such as from a 401(k) to an IRA, either directly or indirectly. During a direct rollover, funds move straight from Account A to Account B. During an indirect rollover, you take possession of funds for a period of time before putting them into the second account.

There are limits to the way that you conduct rollovers, especially indirect rollovers, and it’s important that you work with a financial professional to help you understand how your funds will move and how to make those moves without incurring tax penalties.

 

How to Choose between a Transfer and a Rollover

Sometimes, the account types or the transfer initiator will determine whether your account transition takes place as a transfer or a rollover. In these instances, your financial advisor or another party will inform you of how the move will operate.

When you have the option to choose between transfer or rollover, it’s important to consider the account types that you’re working with and the potential tax implications of each option. While there may not be direct penalties associated with transfers or rollovers, long-term impacts might make one a more favorable option than the other.

As always, when it comes to challenging financial questions, it’s a good idea to discuss the matter with your financial advisor for a personal recommendation that meets your unique needs. To learn more about financial planning, contact Puckett & Sturgill Financial Group today for a consultation!

 

     

    Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation. 

    Ask Deborah: Should I Convert my IRA to a Roth IRA?

    Creating a retirement strategy is an important factor in planning for your ideal financial future. Whether you’re at the first steps and are trying to identify your options or are up for a review of existing accounts, you have plenty of decisions to make.

    Today we’re talking to our very own Deborah Williams, CFP to learn more about a popular retirement topic: should I convert my IRA to a Roth IRA? She’ll answer some questions you may have about who is a suitable candidate for a conversion and what benefits such a decision allows.

    If you have retirement accounts and are considering an IRA conversion, grab a cup of coffee and stay a couple of minutes as we explore the details of this option for your retirement strategy!

    Identifying A Suitable Candidate for a Roth IRA Conversion

    Before you determine whether to make the switch from an IRA to a Roth IRA, you want to identify whether this is an appropriate move for you as an individual. While everyone is unique and your retirement needs may likely differ from those of your neighbors or coworkers, there are some general categories of investors for whom an IRA conversion makes sense.

    Younger investors, for example, can generally benefit from a conversion to Roth IRA, since they have the time to let the investment account compound and grow. If you’re not going to be dipping into your retirement funds for a few decades yet, you may want to consider making the switch.

    Since Roth IRA accounts offer tax savings on distributions and withdrawals, it may be beneficial for those who are in a lower tax bracket currently and anticipate that they will be in a higher tax bracket during retirement to make a conversion. This way, they will pay less tax on the conversion due to their current bracket but enjoy the break later on when they are taking distributions and are in a higher bracket.

    Roth IRAs can also be a strategy for investors who are approaching retirement age and want to avoid having to take their required minimum distribution that is mandated at age 70 1/2. In fact, if you plan to sit on your IRA funds and prefer not to use them extensively during your retirement, these accounts are ideal for passing onto your heirs tax-free.

    Tax Considerations of Converting to a Roth IRA

    For many, the switch from a Traditional IRA to a Roth IRA is motivated by the tax benefits of making such a move. Unlike the IRA there is no tax credit for contributions to a Roth and the value of the account at the time of conversion to a Roth would be added to taxable income for that year. So if your IRA is down in value due to a market loss it may be a good time to consider converting. But if you aren’t able or willing to make the federal and state tax payments that will be attributed to the switch then conversion will not be right for you.

    Roth IRA conversions can also offer very specific tax benefits for business owners who are recording a net-operating business loss. Under certain situations, they can use the value of their loss to offset the additional taxable income created by the Roth IRA conversion. With proper planning and consultation with the CPA even an unfortunate business loss may benefit the owner’s long term retirement plan. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

    Your Retirement Savings Options

    Deciding whether to convert to a Roth IRA is a personal decision that requires careful consideration. If you’d like to learn more about your IRA options or start planning for your retirement, feel free to contact Deborah at Puckett & Sturgill Financial Group for a discovery meeting.

      The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

      Should You Convert to a Roth IRA

      Should You Convert to a Roth IRA

      Individual retirement accounts (IRAs) come in two flavors: traditional and Roth. With a traditional, contributions are potentially tax deductible and taxes on contributions and earnings are paid when funds are withdrawn in retirement. With a Roth, contributions are made after tax, but withdrawals in retirement are generally tax free.

      But even if you have been contributing to a traditional IRA, you are allowed to convert it to a Roth IRA, which may or may not work to your benefit. Before considering a Roth IRA conversion, however, it is important to understand that each type of IRA has its own rules summarized in the table below.

      Traditional Versus Roth: Understand the Differences

      Maximum Annual Contribution

      Traditional IRA

      $6,000 for single taxpayers and $12,000 for couples filing jointly for 2019. An additional $1,000 “catch up” contribution is permitted for each investor aged 50 and older who has already made the maximum annual contribution.

      Roth IRA

      Same as traditional IRA.

      Income Thresholds for Annual Contributions

      Traditional IRA

      None, as long as the account holder has taxable compensation and is younger than age 70½ by the end of the year.

      Roth IRA

      Single taxpayers with modified adjusted gross income (MAGI) of $137,000 or more and married couples filing jointly with MAGI of $203,000 or more are not eligible to contribute in 2019. Income thresholds are indexed annually.

      Deductibility of Contribution

      Traditional IRA

      Yes, if account holder meets IRS requirements (income restrictions apply if account holder or spouse is covered by a retirement plan at work).

      Roth IRA

      Contributions are not deductible.

      Contributions After Age 70½

      Traditional IRA

      Not allowed.

      Roth IRA

      Permitted if owner has earned income.

      Required Minimum Distributions (RMDs) After Age 70½

      Traditional IRA

      RMDs are required.

      Roth IRA

      Not required during original account holder’s lifetime.

      Taxes on Distributions

      Traditional IRA

      Distributions are taxed as ordinary income. Withdrawals before age 59½ may also be subject to a 10% penalty.1

      Roth IRA

      Qualified distributions are tax free. Withdrawals from accounts held less than five years or before age 59½ may be subject to taxes and a 10% penalty.

      Tax Implications

      The good news is that converting a traditional IRA to a Roth IRA will not trigger the 10% penalty that early withdrawals from an IRA usually do. But converting will trigger income taxes on investment earnings and contributions that qualified for a tax deduction. If your traditional IRA contributions did not qualify for a tax deduction because your income was not within the parameters established by the IRS, investment earnings will be taxed but the amount of your contributions will not.

      When a Conversion May Be Beneficial

      Conversion may be advantageous if you are in one of the following situations:

      • You do not plan to access your IRA assets for a long time, and your account will have time to potentially grow and compound before you begin withdrawals.
      • You are not likely to need the Roth IRA assets for living expenses during retirement. Because you wouldn’t have to take RMDs from your Roth IRA, you could leave these assets intact and potentially bequeath a larger sum to heirs.

      When a Conversion May Not Be Beneficial

      A Roth IRA conversion may not be in your best interest if the following circumstances apply:

      • You anticipate being in a lower tax bracket during retirement. Sticking with a traditional IRA could be the best option because your RMDs would be taxed at a correspondingly lower rate.
      • You plan to retire in the near future. Should you convert, your Roth IRA may not achieve adequate short-term growth prior to withdrawals to compensate for the tax payment.
      • You plan to access the IRA for living expenses, and a bequest to heirs is not an issue.

      Converting assets within a traditional IRA to a Roth IRA presents potential benefits, but only if the time horizon, tax issues and estate planning parameters work to your advantage. Review all angles to make sure you make the right choice.


      Footnotes and Disclaimers

      1IRA account holders (both traditional and Roth) may make penalty-free withdrawals before age 59½ only if they meet specific criteria established by the IRS such as disability, first-time home purchase and others. Consult www.irs.gov for additional information.

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      © 2019 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This article was prepared by DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

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