If you’re one of the millions of American’s who have lost their job since the Great Recession began, chances are that you rolled any employer sponsored retirement plan into what’s commonly called a rollover IRA. While at the time this may have been the best option available, does it still fit your current needs? As the economy slowly trickles toward a recovery, you may find yourself newly employed or “retired.” If so, you may be forced to consider whether or not you need to transfer an IRA into another type of account. Here are some things to consider when deciding to roll an IRA into another account.
Currently there are a handful of options you may want to consider.
An IRA Conversion
First if you currently have funds in a rollover IRA, more than likely it is in a traditional IRA form. A traditional IRA means that you can make contributions to the account on a tax-deferred basis. You will, however, be responsible for taxes later in life when you begin withdrawing from the account. For some folks, it might be worth considering an IRA Conversion – going from a traditional IRA to a Roth IRA. In the past this would be hard to do for significant portions of the population do to income restraints and fees associated with the conversion. However, beginning this past January the rules were changed allowing a larger portion of wage earners to be eligible for the conversion. A conversion like this makes sense in this way – while you don’t get a tax break on your contributions, you do get to withdraw from your account tax free when you begin disbursement from the account. Be sure that if you choose this approach to contact a tax professional so that you do not wade into unknown tax liabilities.
Rolling an IRA Back Into an Employer Sponsored Retirement Plan
Another situation you may find yourself in is having the opportunity to move an IRA into an employer sponsored retirement plan. This does not occur frequently, so you will need to do two things to really evaluate your situation. The first is to contact your employers plan administrator to find out if you are eligible to move IRA funds into an employer sponsored plan, as well as their defined rules for doing so. The second thing to do is to once again refer to a tax professional. While it may be easier to navigate one retirement plan, there may be additional advantages to having both an employer sponsored plan, and an IRA. Evaluating those together with a tax professional should provide you the ammunition to make the best decision for your retirement goals.
Converting an IRA into an Annuity
An additional option that may make sense to you is converting an IRA into an annuity. An annuity rules out any control you have over investment choices, but offers the comfort of a periodic check. Be careful when selecting this choice as there are several variations to an annuity, and many of them come with significant fees. Typically an annuity is sold through an insurance company or bank, which can come with very effective, high-pressure sells techniques. It is important for you to consider this option away from the salesman, and with a tax professional. If you are unable to understand what is happening, chances are you should simply walk away.
Avoid These Pitfalls
There are multiple opportunities for you to make a request that will eventually increase your tax liability for a given year, and shave significant portions off of your retirement dollars. When you decide on a conversion or rollover, be sure that you allow the institutions to handle the paperwork and funds transfer. The reason behind this is you can open yourself up to IRS penalties of 20% or more of your retirement funds. This can be as simple as having a check sent to your house, and you depositing the amount. If you let the financial institutions handle it you significantly reduce this risk. Besides, who can afford to throw away any amount of funds during such uncertain economic times?
Again, it is important to note that each individual’s situation may vary significantly which is why it is important to contact a tax professional before finalizing any changes to your retirement accounts as the potential exists to increase your tax liability, and reduce your retirement funds. While the task can seem daunting following these simple tips will help you avoid potential pitfalls, and maximize your nest egg long-term.