Retirement: How to navigate a rollover
Consolidating multiple retirement accounts into one makes it easier to manage. But do you know what money you can roll over to where? Here's a breakdown of your options.
A rollover is transferring funds from an existing retirement account — for example, a 401(k) from your old job — into another type of account. When you have many different plans, consolidating them can save you on fees and give you a clearer picture of your investments.
What follows is a description of the types of plans that your accounts allow rollovers to, along with some restrictions. The government also has a handy rollover chart, which shows these options in a matrix.
Traditional IRA or SEP-IRA. You can roll a traditional individual retirement account or a simplified employee pension account into:
■ Another traditional IRA or SEP-IRA (once per year unless you request direct transfers between your IRA trustees).
■ A Roth IRA. Since a Roth is an after-tax account, you have to pay income tax on the amount you convert. After your contribution, Roth earnings grow tax-free.
■ A qualified retirement plan such as 401(k), school and nonprofit-oriented 403(b), federal government employees' 457(b) plans, profit sharing plan, a defined benefit pension (pre-tax only), where you get a regular payout that's usually based on your years of service and pay.
Roth IRA. This can only be rolled over to another Roth IRA once per year, unless it's a trustee-to-trustee transfer (meaning the money moves between financial institutions sponsoring the funds, not through you).
401(k), 403(b), 457(b) or other qualified retirement plans. You can roll over the pre-tax amounts of these plans into all of the same destination accounts as a traditional IRA, with exactly the same restrictions.
Additionally, you can convert pre-tax money in these accounts to a Roth 401(k), Roth 403(b) or Roth 457(b) within the same plan. The amount you convert is subject to income tax in the year.
The post-tax amounts in these accounts can be rolled into a Roth IRA after you leave employment.
SIMPLE IRA. You can convert a savings incentive match plan for employees (for the self-employed or small business owners) into all of the same accounts as a traditional IRA, with the same restrictions. But your SIMPLE IRA must be at least two years old.
You can roll over a SIMPLE IRA into another SIMPLE IRA without the two-year restriction; however, the once-per-year rule applies unless the rollover is a trustee-to-trustee transfer.
Roth 401(k), Roth 403(b) or Roth 457(b). You can move your assets in these designated Roth accounts to a Roth IRA with no tax consequences. They can also be rolled into the same kinds of Roth accounts of another employer, but only as a direct trustee-to-trustee transfer.
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Jim Blankenship, CFP, is a financial planner at Blankenship Financial Planning in New Berlin, Ill., and a member of the AdviceIQ Financial Advisors Network, which is a Paste BN content partner offering financial news and commentary. Its content is produced independently of Paste BN.