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Overview
The term "rollover" refers to moving money from one type of tax sheltered retirement savings account into another. The money is being rolled over into the new account, often without technically taking a redemption. A redemption would be cashing out the retirement account, and taxes would then need to be paid on the proceeds. A rollover can maintain the tax shelter status of the account.
Types
There are three types of IRA rollovers. One is from a traditional IRA to a Roth IRA in order to take advantage of the better tax benefits of a Roth IRA. Another is from an employer sponsored 401k plan to a traditional IRA. The third is from a 401k plan to a Roth IRA. Rollovers from 401k plans are often done when investors change employers and wants to take their 401k money with them.
Traditional IRA to Roth IRA Rollover
A traditional IRA to Roth IRA rollover is only allowed if the investor is eligible to open or contribute to a Roth IRA. This is regulated by income limits. The modified adjusted gross income can not be higher than $100,000 in the year in which the traditional IRA to Roth IRA rollover occurs. Married people filing separate tax returns are not allowed to rollover a traditional IRA to a Roth IRA. Contact the holder of your traditional IRA and ask for rollover authorization papers. If you don't already have a Roth IRA account you will need to set up a new one. Your traditional IRA will be redeemed and taxes must be paid on the proceeds. This should only be done if there is a long time until retirement so the investor can take advantage of the tax free growth a Roth IRA offers.
401k to Traditional IRA Rollover
A 401k to traditional IRA rollover has very few restrictions. Anyone can open and contribute to a traditional IRA. Contact the holder of your Traditional IRA or set up a new one. Tell them that you will be funding the traditional IRA with a rollover. Next, contact the holder of the 401k and tell them to rollover the funds into the traditional IRA. Some 401k accounts will electronically send the funds directly to your traditional IRA. Some will send you a check made out to the traditional IRA account. It is up to you to forward this check to the holder of your traditional IRA. Do not cash the check. That would be considered a redemption and require you to pay taxes and a 10 percent penalty.
401k to Roth IRA Rollover
A 401k to Roth IRA Rollover is restricted by income limits. If an investor's modified adjusted gross income is more than $100,000 the 401k to Roth IRA rollover can not take place in that tax year. Contact the holder of your Roth IRA or set up a new one. Tell them that you will be funding it with rollover money. Contact the holder of the 401k and tell them to rollover the funds into the Roth IRA. Choose to have the funds electronically transferred to your Roth IRA if that is an option. Otherwise have them make out the check directly to the Roth IRA account. When you receive it, immediately forward it to the Roth IRA.
Age Limits
Consider your age before performing an IRA rollover. Investors can no longer make contributions to traditional IRAs once they reach the age of 70 and one half years. They are also forced to start taking distributions. There are no age restrictions on contributions or distributions with Roth IRAs.
