What Every Financial Professional Should Know about IRA Rollovers
An IRA rollover is the act of moving assets, without tax consequences to the client, from an employer-sponsored plan into a traditional IRA. For the purposes of this article, I will also discuss converting a traditional IRA to a Roth IRA.
There is an up-front tax consequence to a conversion (taxes must be paid at the time of the conversion), but a client may be able to take income from his or her Roth IRA tax-free as long as he/she meets certain requirements.
IRA Rollover Basics
In considering whether an IRA Rollover or Roth IRA conversion may be appropriate, it's important to keep in mind:
- The different types of IRAs
- How IRAs compare to employer-sponsored plans
- What kinds of assets are eligible for rollovers
Financial professionals may want to consider using the IRA Rollover Checklist when evaluating if performing a rollover is in the best interest of their client.
While IRAs come in several forms, most fall into three categories:
1. Traditional IRA: A client with earned income and who is younger than age 70½ can contribute to a traditional IRA. Depending on the client's income level, traditional IRAs offer tax deductions for all or part of contributions.
2. Roth IRA: Roth IRAs allow a client to make contributions with after-tax money and offer no tax deductions. Investors pay taxes now and may enjoy tax-free income later. However, the client must hold his or her Roth IRA for at least five years and not take distributions before reaching age 59½ for the growth portion of the Roth IRA to be tax-free.
3. Inherited IRA: When an IRA owner dies, the designated beneficiary, if an individual, can establish an inherited IRA and start taking required minimum distributions. By spreading the death benefit over the beneficiary's own life expectancy, he or she can reduce current income-tax liability by not taking a lump-sum distribution. The beneficiary can also enjoy continued tax deferral on the assets remaining in the inherited IRA.
The following charts can be found in the IRA Rollover Playbook, which also provides financial professionals with information, tools, resources, and may help uncover opportunities in today's IRA rollover market.
| Traditional IRA | |
|---|---|
| Eligible Participants | Must have earned income and be younger than age 70 ½. Individuals with certain modified adjusted gross income levels may not be able to fully deduct contributions. |
| Contibution Limit for 2017 | $5,500 |
| Catch-Up Limit for 2017 | $1,000 |
| Taxation of Distribution | Ordinary Income |
| Roth IRA | |
| Eligible Participants |
Must have earned income. No maximum age restrictions. Individuals with certain modified adjusted gross income levels may not be able to contribute. |
| Contribution Limit for 2017 |
$5,500 |
| Catch-up Contribution for 2017 |
$1,000 |
| Taxation of Distributions | Qualified distribution: no income tax |
| Defined Benefit Plan | |
| Eligible Participants |
Two years of service with employer (one year of service with employer for 401(k) plans). Must be at least 21 years old. Must work at least 1,000 hours per year. Plans may offer less restrictive participation requirements. Check with plan for specifics. |
| Contribution Limit for 2017 |
Maximum annual benefit $215,000 |
| Catch-up Contribution for 2017 |
N/A |
| Taxation of Distributions |
Ordinary Income |
| Defined Contribution Plan | |
| Eligible Participants |
Two years of service with employer (one year of service with employer for 401(k) plans). Must be at least 21 years old. Must work at least 1,000 hours per year. Plans may offer less restrictive participation requirements. Check with plan for specifics. |
| Contribution Limit for 2017 |
Employee Salary Deferral: Lesser of 100% of compensation or $18,000. Employer Profit Sharing: Lesser of 25% of compensation or $54,000. Total Contribution: Lesser of 100% of compensation or $54,000 ($60,000 if age 50 or older). |
| Catch-up Contribution for 2017 |
$6,000 |
| Taxation of Distributions |
Ordinary income and/or net unrealized appreciation |
Eligible Rollover Types
Assets from these accounts may be rolled into:
| Traditional IRA | Roth IRA | Defined Benefit Plan | Defined Contribution Plan |
|---|---|---|---|
| Another IRA SEP-IRA TSA/403(b) plan 401(a) or 401(k) plan 457(b) governmental plan Individual(k) Roth IRA1 SIMPLE IRA2 |
Another Roth IRA
|
Another 401(a) or 401(k) plan IRA SEP-IRA TSA/403(b) plan 457(b) governmental plan Individual(k) Roth IRA1 SIMPLE IRA2 |
|
1When converting from a traditional IRA to a Roth IRA, taxes are due on the traditional IRA assets at the time of the conversion.
2During the first two years after an employee's SIMPLE IRA is established, assets should not be rolled over or converted to any type of retirement account except another SIMPLE IRA. If distributions do not meet this two-year rule, they will be subject to an additional 25% federal tax.
Steve is a Senior Retirement Strategies Consultant with the Retirement Solutions Division at Pacific Life. He brings more than 25 years of industry experience in financial planning and wealth management, including detailed knowledge of both employer-sponsored retirement plans and retirement-planning strategies.
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