IRA

What Every Financial Professional Should Know about IRA Rollovers

August 2, 2017

When considering whether an IRA rollover may be appropriate for your clients, it’s important to keep in mind these things.

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 advisors with information, tools, resources, and may help uncover opportunities in today's IRA rollover market.


 

Overview of IRA and Employer-Sponsored Plans

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.

Picture of Steve Chmelka

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.

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. 

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency