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Is It Time to Rethink Your IRA Strategy?

 Did you know that the average person changes jobs 9 times between the ages of 18 and 34? How about you? How many times have you changed jobs and left money stranded in a former employer's retirement plan?

The good news is that there is a simple solution for managing all of those different accounts and maintaining their tax-deferred benefits -- all while gaining access to a broader universe of investment choices.

Keep It Simple With an IRA
"Rolling over" money from one or more employer-sponsored retirement plans into an IRA may offer a number of important benefits, including the following:

  • Avoid penalties and tax withholding. When account assets are transferred to an IRA via a "direct rollover" (meaning the financial institution that administers your former employer's retirement plan transfers the money straight into a Rollover IRA), you avoid any potential penalties or the need for tax withholding.

  • Wider investment selection. Depending on the financial institution that provides the Rollover IRA, you could have a broader array of investment choices at your disposal, including mutual funds, stocks, bonds, and CDs, than your previous employer-sponsored plan offered.

  • Consolidation. If you still have money in several different retirement plans sponsored by several different employers, you can transfer all of those assets into one Rollover IRA. That means you will only need to review and keep track of one account statement each quarter.

  • Traditional or Roth. Beginning this year, individuals are able to roll assets from a company-sponsored retirement account or a tax-sheltered annuity into a Roth IRA, provided all qualifying conditions are met. The rollover will be treated as a "conversion" with income taxes due up-front.

Roth IRA Versus Traditional IRA

When choosing between a Roth IRA or a traditional IRA, consider the following:

 Roth IRA

 Traditional IRA

 Contributions are made with after-tax money.

Contributions can be made tax free (depending on income limits).

Withdrawals made after age 59 1/2 are tax free.

Withdrawals made after age 59 1/2 are taxed at ordinary income tax rates.

No minimum distributions are required.

Minimum distributions are required after age 70 1/2 years.

Not available to those making over certain income thresholds.

Available to all; tax-free deductions applicable to only those making under certain income limits.

Cannot be converted to a traditioinal IRA.

Can be converted to a Roth IRA; however, tax considerations apply.

                             

Given these differences...

  • A Roth IRA may be best if you expect to be in a higher tax bracket during retirement, since your withdrawals are tax free.
  • A traditional IRA might be the best choice if your tax bracket is higher now than it will be during retirement.

Rollover IRAs and Estate Planning

The flexibility that defines Rollover IRAs as a retirement savings tool also applies from an estate planning perspective.

In general, IRAs are more useful in estate planning than employer-sponsored plans because IRA assets can generally be divided among multiple beneficiaries, each of whom can maintain tax-advantaged investment management during their lifetimes.

In addition, recent tax changes now allow non-spousal beneficiaries to roll inherited IRA assets as well as inherited employer-sponsored plan assets into their own IRA, preserving the assets' tax-deferred tax status. Previously this benefit was only available to surviving spouses.

While it is not the purpose of this article to explore the details of estate planning, it is helpful to understand that there is more to IRA planning than executing a rollover. To learn more about the potential retirement and/or estate planning benefits of a rollover IRA, you should seek the advice of your qualified financial and/or tax professional.


This article is not intended to provide specific investment or tax advice for any individual. Consult me, your financial advisor, or your tax advisor if you have any questions.

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