A Roth IRA rollover involves moving retirement funds between custodians. Investors should choose investments based on their age and risk tolerance. Rollovers can be initiated by taking possession of funds or directing custodians to transfer them. Investors can only complete one rollover per year.
A Roth Individual Retirement Account (IRA) is a type of retirement account available to taxpayers in the United States. Roth IRA rollovers involve an investor moving retirement funds between financial institutions that serve as Roth IRA custodians. Investors who plan carefully can avoid paying fees and withholding taxes when transferring Roth IRA funds.
The first decision an investor must make before making plans for a Roth IRA rollover is deciding what type of investment to make with the account proceeds. Most investors nearing retirement age are primarily concerned with fund preservation. Conservative investments, such as bank certificates of deposit (CDs), offer principal protection and higher interest rates than savings accounts. Fixed annuities issued by insurance companies are not federally insured, but offer principal guarantees and a fixed interest rate. Investors should shop around for the best CD and annuity rates at local banks.
Younger investors and people with a more aggressive investment outlook should consider investing in stocks, bonds, or mutual funds. These products have historically allowed investors to enjoy higher returns than conservative products, such as CDs, but there are no principal guarantees because investments can lose value. Mutual fund companies often charge fees known as load fees when people buy stocks, but these fees can be avoided if you invest in no-load funds. Authorized representatives at banks can provide investors with prospectuses of various mutual funds so that investors can choose the funds that best suit their needs.
Investors can initiate a Roth IRA rollover by taking possession of the funds and reinvesting the money into a new Roth IRA within 60 days, or by directing the account custodian to transfer the money directly to a new custodian bank or investment firm. The simplest rollovers involve custodians exchanging the funds directly, because no fees are withheld. When an investor takes possession of the funds, the IRS requires the custodian to withhold 20% of the disbursement amount to cover the withholding tax. The investor must replenish the money with segregated funds to complete the Roth IRA rollover, and then claim taxes at the end of the tax year.
IRS rules allow taxpayers to complete a Roth IRA rollover only once a year. Investors shouldn’t use a Roth rollover IRA to transfer funds to a bank that offers a short-term CD if they intend to transfer the funds elsewhere within a year. People who transfer the same IRA funds twice in one year face a tax penalty.
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