When you change your job or retire, you can “roll over” the assets in your employer-sponsored retirement plan, such as a 401(k), into a traditional individual retirement arrangement, known as a rollover IRA. Rolling over these funds allows you to defer paying taxes until you start taking distributions from your rollover IRA.
Rollover IRA Rules
There are three ways in which to roll over a retirement plan distribution, as per the Internal Revenue Service. A direct rollover occurs when the account owner asks the plan administrator to roll their plan over directly into a traditional IRA. If the retirement distribution is from another IRA, a trustee-to-trustee transfer makes the payment directly from the other IRA account to the rollover IRA. If a person receives their retirement plan distribution directly, they have 60 days in which to roll it over into an IRA without facing tax consequences.
For example, a Fidelity rollover IRA requires opening the appropriate IRA, initiating a rollover from the employer’s plan to Fidelity, and choosing the investments for the rollover IRA. If you already have a traditional IRA at Fidelity, you can simply roll over your employer-sponsored plan assets into that account.
Roll Over 401(k) to IRA Tax Consequences
As long as you follow the rules for rolling over your retirement plan to a rollover IRA, you can defer taxes on your rollover. However, some people may want to convert some or all of their retirement plan assets to a Roth IRA. In doing so, they must pay taxes on the amount converted to a Roth at ordinary income rates. Unlike traditional IRAs, in which taxes are deferred, there are no taxes on Roth distributions if the account is open at least five years.
Contribute to a Rollover IRA
If you continue working, you can contribute to your rollover IRA within IRA contribution limits. For 2019, you can contribute up to $6,000 annually, as long as you earned that much in income. Those over 50 may add an additional catch-up contribution of $1,000, for a total of $7,000 annually. If you are not covered by a retirement plan at work, you can deduct your traditional IRA contributions on your federal income tax.
IRA Contribution Deductions
Even if you are covered by an employer-sponsored retirement plan, you may still deduct your traditional IRA contributions or part of them. For single workers, those with an adjusted gross income of less than $64,000 may deduct up to the IRA contribution limits. If the AGI is between $64,000 and $74,000, a partial deduction is available. When the AGI is above $74,000, there is no tax deduction, but contributing to an IRA is still an excellent way to save for retirement.
For married couples filing jointly, much depends on whether one spouse is covered by a workplace plan. If the spouse making the IRA contribution is covered by an employer-based plan, the couple may deduct the maximum amount for both of them if their AGI is under $103,000. The phase-out for deductions is between $103,000 and $123,000, with no deductions allowed above $123,000.
When the IRA contributor does not have a workplace plan but their spouse does, the AGI limits differ. The couple may still deduct their maximum contributions if their AGI is below $193,000, with the phase-out amounts ranging from $193,000 to $203,000. Above that, no deduction is permitted. Keep in mind that those amounts are adjusted each year.
Rollover IRAs and Mandatory Distributions
Even if you continue working past the age of 70 1/2, you can no longer contribute to your rollover IRA or any type of traditional IRA after that age. You may, however, continue to contribute to a Roth IRA. By age 70 1/2, you must start taking required minimum distributions from your traditional rollover IRA. Roth IRAs do not require mandatory distributions.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Financial Advisor, Sapling, nj.com and The Nest.