Your rollover individual retirement account doesn't just have to sit there. Once you've funneled money into a new IRA from another account, it's just like any other IRA. You're allowed to keep building your nest egg with yearly contributions or more rollovers, as long as you follow the tax rules. As of 2013, you can contribute up to $5,500 a year or your taxable compensation, whichever is less. There's no limit on rollover amounts.
The Internal Revenue Service doesn't limit how much money you can roll into your IRA from other accounts. If you rolled over a 401(k) from your last job but have another 401(k) from two or three jobs ago, you can shovel all of that money into your IRA. The IRS limits you to making one indirect rollover a year -- that's when the rollover check goes to you before you deposit it in your IRA. You can do as many direct rollovers, or trustee-to-trustee transfers, as you want in a year. As long as the cash comes from another traditional IRA or 401(k) plan, you won't be on the hook for any taxes.
You can roll money from a traditional account into a Roth IRA, but it'll cost you some cash. Because you fund a Roth with after-tax dollars and put pretax funds in a traditional IRA or other tax-deferred plan, you must pay taxes on the amount you rollover. You won't owe a penalty if you pay the taxes with money from other sources. Any cash you take out of your rollover to pay taxes is treated as a withdrawal and hit with a 10 percent early withdrawal penalty.
Adding Too Much
If you go over the limit on yearly contributions, the IRS socks it to you. The agency taxes excess contributions at 6 percent a year for as long as they're in the account, and you can't write them off on your income taxes. You can pull out excess contributions tax-free at any time to stop the penalty. If you have extra money to squirrel away for retirement, open a separate account and put it there.
When you roll money into an IRA, you're giving up an important benefit of investing in a 401(k). Money in a 401(k) is protected from creditors if you ever have to file for bankruptcy. IRAs are generally protected up to $1 million. Keeping your rollover amounts and yearly contributions in separate IRAs may give your nest egg more protection.
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