An individual retirement arrangement allows you to save "tax-advantaged" dollars for your post-employment golden years. IRAs come in two flavors: With a traditional IRA, the contributions are tax deductible; with a Roth, the account earnings are tax-free when you withdraw the money. You open IRA accounts with a custodian such as a bank or broker, and you can transfer the money to another custodian without penalty as long as you follow the rollover rules.
Traditional IRA Withdrawals
The IRS rules on IRAs are designed to keep the money in the account, and under professional management, until you reach retirement age, which for IRA purposes is set at 59-1/2. If you own a traditional IRA and withdraw money before reaching retirement age, you will owe a 10 percent penalty in addition to taxes on the accumulated income.
Rolling Over Your IRA
If you're dissatisfied with your IRA manager, you can move the account to a different institution with an IRA rollover. You do this by either withdrawing the funds from the account yourself or having the current manager transfer the account funds directly to the new manager. If you withdraw the money yourself, you have 60 days to complete the rollover to the new manager. If you don't make the deadline, then the 10 percent penalty will apply and you will also be liable for income tax on the account earnings, if any. Doing the direct transfer, however, avoids any possibility of an early-withdrawal penalty. With either method, you still must report the rollover on your tax return.
If you move assets from a traditional IRA to a Roth, you're doing a "conversion." The IRS requires that you move the same property from one account to the other -- the same cash, stocks, mutual funds, bonds and any other assets. Even if you do the conversion within 60 days, this is still a taxable event, and you'll have to include the account earnings in your gross income when you file taxes. If you've reached the age of 70-1/2 and are required to take distributions from the traditional IRA, then you can't convert them to the Roth. You will have to keep the assets and pay income tax on the distribution.
Limits on AGI and Rollovers
The IRS places an important income restriction on IRA rollovers and conversions. If your adjusted gross income is more than $100,000, then you may not convert from a traditional IRA to a Roth, whether or not you are changing account managers. This applies to all taxpayers regardless of their filing status: single, married filing joint, or head of household. If you file married, separate, then you can't convert from traditional to Roth no matter what your AGI is. If you take a distribution and then try to convert it in violation of these rules, you'll be paying taxes on it.
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