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What is a rollover IRA, and do I need one?

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Duane J. Silbernagel
Financial Advisor
Waddell & Reed

What is a rollover IRA, and do I need one?
Provided By: Duane J. Silbernagel CFP®

Generally, the term “rollover IRA” refers to an IRA that you establish to receive funds from an employer retirement plan like a 401(k). A rollover IRA is also sometimes referred to as a “conduit IRA.”

When you roll funds over from an employer plan to an IRA, your financial institution may suggest that you use a rollover IRA to receive the funds. Of course, you can transfer those dollars to any other IRA you own at some future date, because there’s no legal requirement that you keep your plan distribution in a separate IRA. But even though separate IRAs are not legally required, there are at least two reasons to consider keeping your employer plan rollover separate from your contributory IRAs.

The first reason to maintain a separate rollover IRA deals with federal bankruptcy law. Your IRAs are protected from your creditors under federal law if you declare bankruptcy, but this protection is currently limited to $1.28 million for all your IRAs.1 The $1.28 million limit doesn’t apply, though, to amounts you roll over to an IRA from an employer plan, or any earnings on that rollover. These dollars are protected in full if you declare bankruptcy, just as they would have been in your employer’s plan. Obviously, it’s easier to track the amount rolled over, and any future earnings, if you keep those dollars separate from your contributory IRAs. So a rollover IRA may make sense if creditor protection is important to you.

The second reason to maintain a rollover IRA is that you might decide in the future that you want to roll your distribution back into a new employer’s plan. In the distant past, employer plans could accept rollovers only from rollover (conduit) IRAs — rollovers from contributory IRAs weren’t permitted. Now, however, employer plans can accept rollovers from both contributory IRAs and rollover IRAs.2 Despite this, employer plans aren’t required to accept rollovers, and they can limit the types of contributions they’ll accept. And while it’s becoming less common, some still accept rollovers only from rollover IRAs. So keep this in mind if you are contemplating a rollover back to an employer plan in the future.

1 SEP and SIMPLE IRAs have unlimited protection under federal bankruptcy law.

2 Nontaxable traditional IRA dollars can’t be rolled back into an employer plan.

Can I roll my traditional 401(k) account balance over to a Roth IRA?

Yes, you can make a direct or 60-day rollover from a 401(k) plan [or other qualified plan, 403(b) plan, or governmental 457(b) plan] to a Roth IRA, as long as you meet certain requirements.*

First, you must be entitled to a distribution from your plan. While you can always access your account when you terminate employment, in some cases you may be able to withdraw your own or your employer’s contributions while you’re still working (for example, at age 59½).

[Note: Your plan may also permit the “in plan” conversion of all or part of your account balance to a Roth account, regardless of whether you’re eligible for a distribution from the plan. Check with your plan administrator.]

Second, your distribution must be an “eligible rollover distribution.” Distributions that cannot be rolled over include hardship withdrawals, certain periodic payments, and required minimum distributions (RMDs).

Third, you must include the taxable portion of the distribution in your gross income in the year you make the rollover (“conversion”). But that’s the price you have to pay to potentially receive tax-free qualified distributions from your Roth IRA in the future.

Fourth, if your distribution includes both after-tax and pre-tax dollars, you can generally direct that only the after-tax dollars be rolled over to the Roth IRA (resulting in a tax-free conversion), while making a tax-deferred rollover of the pre-tax dollars to a traditional IRA.

When evaluating whether to initiate a rollover from an employer plan to an IRA, be sure to: (1) ask about possible surrender charges that your employer plan or IRA may impose, (2) compare investment fees and expenses charged by your IRA with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan. Also consider all of your distribution options, including leaving the money in your employer’s plan, transferring the funds to a new employer’s plan, or taking a cash withdrawal.

* If you make a 60-day rollover, your plan will withhold 20% of the taxable portion of your distribution for federal income tax purposes.

I hope you found this beneficial and informational. For more information about me and my services, visit my website:
www.duane.wrfa.com
Thank you for your interest.

Duane Silbernagel is a Financial Advisor in Lincoln City, Oregon offering securities through Waddell & Reed, Inc., Member FINRA and SIPC. He can be reached at (541) 614-1322 or via email at DSilbernagel@wradvisors.com.
 
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. The article was written by an independent third party, Broadridge Investor Communication Solutions, Inc. (Copyright 2017) and is provided for informational and educational purposes only. Waddell& Reed is not affiliated with www.newslincolncounty.com website and is not responsible for any other content posted to this website.  (07/17)

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