You contributed money to an Individual Retirement Agreement a few years ago, but economic conditions have changed. Now you see an opportunity to earn more in an IRA with a different financial institution. The Internal Revenue Service allows you to move the money in a rollover, but that doesn't identify a particular type of IRA. The IRS classifies IRA types as Traditional, Roth, SEP and Simple.
The type of IRA the IRS allows you to set up depends on your job. If you work for a large company, you may have a Traditional or Roth IRA. If you’re self employed, or work for a small company, you may set up a Savings Incentive Match Plan for Employees (Simple) or Simplified Employee Pension (SEP). All IRAs offer tax advantages as an incentive for you to set aside money for your later years. The IRS has limits for your annual contribution, but not your number of accounts. You may set up more than one IRA to diversify your portfolio.
The Simple plan automatically takes money out of your pay and puts it into the IRA. It also allows the company to add more. The total goes into the IRA tax-free, giving both the employer and the employee incentive. The IRS limits the contribution amounts, which may change annually.
No matter what type of IRA you have, the money itself may be invested in various financial instruments such as certificates of deposit, brokerage accounts or mutual funds. Once your money is in, you can't withdraw it before retirement unless you want to pay a penalty. However, if the original account isn't giving you the earnings you expected, you can roll the money over to a new one in a different IRA without paying a penalty. All you have to do is tell the current account holder where you want the money to go.
A rollover usually moves money within the same type of IRA. For example, you can roll money from a certificate of deposit in a Traditional IRA to a mutual fund in another Traditional IRA. You may also move from a Traditional to a Roth to pay the tax at the time of the rollover instead of retirement. You may rollover money from a Simple IRA to a Traditional, Roth or SEP after it’s been invested for two years, but you can't rollover from any other IRA into a Simple.