Rollover IRA Information
Just as the name suggests, an IRA rollover refers to the process of transferring of funds from a retirement account into a traditional or Roth IRA. Both the traditional IRA and Roth IRA are, by government definition, an Individual Retirement Account. An Ira account is a personal type of savings account set up specifically to allow individuals to save pre-tax funds for the individual’s retirement. A maximum amount of contribution is allowed per year. The amount of the actual account contribution is a direct deduction off of the gross income of individual, thereby reducing their tax for the year in which the contribution was made.
One of the benefits of a traditional IRA account is a deferment of tax on the funds until withdrawal in whole, or in part is made during retirement. It is supposed that during retirement, the tax rate on an individual will be significantly less than it was at the time IRA contributions were made. Usually, for early withdrawal, along with paying the regular income tax, the individual is also required to pay a 10% penalty.
IRA accounts may be held at the same time an individual has a company sponsored retirement plan. Movement of funds from company sponsored retirement plans to an IRA is called an IRA Rollover.
IRA accounts can be set up in various ways. Some IRA account types may not have funds comingled, or mixed, with other types of IRA funds. An example of this is the previously mentioned ROTH IRA. A ROTH IRA is account where all contributions came from post-tax (already taxed) sources. Withdrawals from ROTH IRA accounts are not usually taxable. That means that the withdrawer gets to enjoy every dollar they contributed.
When a rollover IRA transaction occurs, the rollover IRA movement must be done carefully to avoid loss of tax deferment benefits. For example, when this transfer of funds from the employer sponsored retirement plan is done by check, there is 20% tax withholding penalty before the manager, called a custodian, writes the check. The only way to avoid the penalty is for the rollover IRA transfer to take place directly from one fund manager to the other.
Most IRA accounts allow only one rollover IRA transaction per year if the transfer being done is IRA to IRA. Usually rollovers take place due to job changes. When that occurs, the individual IRA account holder would want to move assets from his/her old company retirement plan, or other retirement plans. In general, the options for investment choices with an IRA are very diverse.
Also, a rollover IRA transaction may occur from another retirement account, such as a 401(k) or from one IRA to another IRA owned by the same person. Rollovers into the ROTH type IRA can only take place if the beneficiary of the IRA has an adjusted gross income that is below a certain level in the tax year. This is an important point because even if the rollover IRA was requested just before the end of one calendar year, it does not count for that year unless movement is completed before midnight on the 31st of December for that year.
Occasionally taxpayers are confused about rollover IRA transactions because they have read in the tax return instructions about Rollovers as business start-up transactions. The IRS terminology for this type of rollover is ROBS. It has no connection or relevance with normal IRA rollover transactions. It is an unfortunate use of the word rollover.
Even though some taxpayers feel it is a good idea, and a way to help start a business after losing a job, a study by the government has revealed that there are limited occasions of success after ROBS transactions. The high rates of failures were often involved in losses that ended in bankruptcy.
As the reason for IRA accounts is assistance to individuals for accumulation of tax deferred retirement funds, the so-called ROBS is not allowed as an authorized IRA withdrawal. The IRS has claimed in audits that the only reason for individuals claiming an ROBS was the avoidance of the 20% penalty on early withdrawal of IRA account funds. The tax rules for 2012 is expected to eliminate the favourable tax treatment originally meant for ROBS transactions.
