Retirement

You can distribute the contributions you made at any time without taxes or penalties. If it’s been at least five years since you first funded a Roth IRA and you’re 59½ or older, you can also distribute your earnings tax and penalty free. However, if you don’t meet both criteria, a distribution of earnings may be subject to taxes and/or a 10% penalty

A Roth conversion is when you move funds from a traditional IRA to a Roth IRA. With a Roth conversion, you pay taxes now to have access to tax-free distributions in the future, as well as other benefits Roth IRAs offer. But, once a traditional IRA is converted to a Roth IRA, you can’t undo this action. While there are no eligibility requirements for a Roth conversion, there are several factors to consider when determining whether a Roth conversion makes sense for you, including your current tax rate versus your expected tax rate in retirement, your ability to pay taxes on the conversion, when you need to access your funds, your current mix of pretax and after-tax assets, and your desire to leave a tax-free inheritance for your heirs. A financial professional can help you determine whether a Roth conversion is a good option for you.

A Roth 401(k) and a Roth IRA are both retirement savings accounts that offer tax-free withdrawals in retirement, but they differ in how they are funded, contribution limits and other features. Roth 401(k)s are employer-sponsored plans with higher contribution limits and potential for employer matching, while Roth IRAs are individual accounts with lower contribution limits and more investment flexibility. Anyone can contribute to a Roth 401(k), regardless of income.

You generally must meet two criteria to be able to roll over your employer retirement plan to an IRA:

• Your plan must allow you to take a distribution.
• The distribution must be eligible to be rolled over. Certain distributions, such as required minimum distribution (RMDs) and hardship distributions, aren’t eligible.

Additionally, Roth 401(k) assets may only be rolled over to a Roth IRA. Pretax 401(k) assets can be rolled over to a traditional or a Roth IRA. But if you roll over pretax 401(k) assets to a Roth IRA, it’s considered a Roth conversion and the amount that’s rolled over will be taxed. It’s also important to know that there are differences between employer plans and IRAs. Make sure you understand your options before rolling over. A financial professional can also help you determine whether rolling over makes sense for you.

Distributions of any pretax (deductible) contributions and earnings are taxed as ordinary income. However, distributions before age 59½ may be subject to a 10% early withdrawal penalty, in addition to regular income taxes, unless you qualify for a penalty exception.

Distributions of after-tax contributions (non-deductible) aren’t subject to taxes or penalties, since you’ve already paid taxes on those dollars. However, if you have pretax and after-tax assets in your traditional IRA(s), your distribution will include a mix of pretax and after-tax dollars based on the percentage each represents for your total IRA account value. This is known as the pro rata rule.

To determine the percentage of your distribution that’s made up of pretax dollars (and subject to taxes), the IRS looks at all your traditional IRAs (including SEP and SIMPLE IRAs), not just the IRA you took the distribution from.

One of the main differences is the way contributions and withdrawals are taxed. Traditional IRA contributions are generally made with pre-tax dollars, any earnings growth is tax deferred and future withdrawals are taxed like income. Roth IRA contributions are made with after-tax dollars and future, qualified withdrawals are tax free.

Another difference is required withdrawals. If you have a traditional IRA, the IRS requires you to withdraw a minimum amount each year when you reach 73, known as a required minimum distribution (RMD). A Roth IRA has no RMDs.

A 401(k) through your employer is designed to allow you to contribute a percentage of your salary for retirement savings. Employer plans may offer a traditional 401(k) and a Roth 401(k) for employees. Like an IRA, a traditional 401(k) is funded with pre-tax dollars and distributions are taxed as ordinary income, while a Roth 401(k) is funded with after-tax dollars with the potential for tax free withdrawals in the future.

With a 401(k), your employer makes several decisions on your behalf — where your account is held, when you’re eligible to contribute, what investment options and services are available to you and when you can take distributions from your account to name a few. 401(k) plans are generally less expensive than an IRA and can offer certain benefits that are unavailable to IRAs, such as employer matches, the ability to borrow against your assets, the ability to take penalty-free withdrawals beginning at age 55 if you meet certain criteria and the ability to delay RMDs while still working.

A traditional IRA is an individual account you contribute to and manage. It offers you more control and choice over where and how your contributions are invested as well as when you can access your funds. These accounts are not tied to your employer and are transferable between institutions at any time

If you want to maximize your retirement savings, you can contribute up to annual limits for your 401(k) and a traditional IRA as long you meet the eligibility requirements.

You generally must meet two criteria to be able to roll over your employer retirement plan to an IRA:

• Your plan must allow you to take a distribution.
• The distribution must be eligible to be rolled over. Certain distributions, such as RMDs and hardship distributions, are not eligible.

Additionally, Roth 401(k) assets may only be rolled over to a Roth IRA. Pre-tax 401(k) assets can be rolled over to a traditional or a Roth IRA. But, if you roll over pre-tax 401(k) assets to a Roth IRA, it’s considered a Roth conversion, and the amount that’s rolled over will be taxed.

It’s also important to know that there are differences between employer plans and IRAs. Make sure you understand your options before rolling over. A financial professional can help you determine whether rolling over makes sense for you.

You’ll need to determine what type of IRA you can roll your 401(k) over to:

• A Roth 401(k) can only be rolled over to a Roth IRA.
• A traditional 401(k) can be rolled over to a traditional IRA or Roth IRA. If you roll it to a Roth IRA, though, it’s considered a Roth Conversion, and the rollover is subject to taxes. Even if you want to convert your assets, it may be easier to roll over to a traditional IRA first and then complete a Roth conversion.

Next, decide how to move your 401(k). Money can be moved from an employer plan into an IRA through either a direct rollover or an indirect rollover.

Direct Rollover

You generally want to move your money through a direct rollover. A direct rollover occurs when your plan issues a check or securities payable directly to an IRA custodian for your benefit. It’s generally a non-taxable distribution, and no taxes are withheld from the amount you roll over. If you have an RMD, though, you must take it before requesting the rollover since RMDs cannot be rolled over.

Indirect Rollover

An indirect rollover occurs when your plan issues a check payable directly to you and you roll over the money to an IRA within 60 days. With an indirect rollover, the taxable portion of the distribution is subject to a mandatory 20% federal tax withholding. Any amount, including the 20% withholding, not rolled back into an IRA within 60 days is generally taxable and possibly subject to an early withdrawal penalty.