Investors can avoid fees and taxes when rolling over Roth IRA funds by carefully planning their investments. Conservative options like bank CDs and fixed annuities offer principal protection, while stocks, bonds, and mutual funds provide higher returns but no guarantees. Investors can initiate a rollover by taking possession of the funds or instructing the custodian to transfer them directly. IRS rules only allow 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 custodians of the Roth IRA. Investors who plan carefully can avoid paying fees and having taxes withheld when they roll over Roth IRA funds.
The first decision an investor must make before planning a Roth IRA rollover is deciding what type of investment to make with the income from the account. Most investors who are close to retirement age are primarily concerned with the preservation of funds. Conservative investments, such as bank certificates of deposits (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 those 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 may lose value. Mutual fund companies often charge commissions known as load fees when people buy shares, but these fees can be avoided by investing in no-load funds. Licensed representatives at banks can provide investors with prospectuses for 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 rolling the money into a new Roth IRA within 60 days, or by instructing the account custodian to transfer the money directly to a new custodian bank or lending firm. investment. The simplest transfers involve custodians exchanging funds directly, because no taxes are withheld. When an investor takes possession of the funds, the IRS requires the custodian to withhold 20 percent of the disbursement amount to cover withholding taxes. The investor has to replenish the money with separate funds to complete the rollover from the Roth IRA and then claim the taxes at the end of the tax year.
IRS rules only allow taxpayers to complete a Roth IRA rollover once a year. Investors should not use a Roth IRA rollover to transfer funds to a bank that offers a short-term CD if they intend to transfer the funds elsewhere within one year. People who roll over the same IRA funds twice in one year must pay a tax penalty.
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