The Most Comprehensive Financial Dictionary with over 1000 Financial Terms Explained - Clear and Concise Article Style Description with Practical Examples

What is a Rollover IRA?

2017-06-28T09:40:12+00:00

The term 'Rollover IRA' is included in the Investments edition of the Financial Dictionary. Get yours now on mazon in ebook or paperback format. Read more here...

An IRA is the acronym for Individual Retirement Account. These accounts represent a form of government-approved and -created savings account for retirement. They have several advantages, the main one of which is the significant tax breaks they receive in tax deferment. This makes them the optimal way to put cash aside towards eventual retirement. It is important to know that IRAs are not investments. Instead they are more like the basket in which individuals maintain their mutual funds, stocks, bonds, and other assets. When one retirement account is transferred to another one, this is known as a Rollover IRA.

Generally people open such a Rollover IRA themselves. There are also a few types which small business owners and the self employed can open. Among the various types of Individual Retirement Accounts in existence are the Roth IRAs, traditional IRAs, SEP IRAs, and SIMPLE IRAs. Not all of these can be accessed by every individual in the U.S. This is to say that every one of them has specific eligibility requirements which revolve around the type of employment and income level. What they do all have in common is the caps on the amount individuals are allowed to contribute every year. They also mostly share steep penalties for withdrawing funds ahead of the government set age of retirement.

The greatest benefit to these accounts lies in their ability for all of the assets within the plan to gain in value while not being taxed by the U.S. Federal government. This means that all income generated by capital gains, dividends, and interest will compound every year with no tax bite. Taxes on the majority of these forms of IRAs only become due as the owners take qualified (or unqualified with a penalty) distributions. There are two different forms of this. With the majority of the IRAs, individuals are able to commit pre-taxed dollars to the account. With Roth IRAs, the dollars are after-taxed, but then no additional taxes on them will be required upon withdrawals at retirement. Using the Rollover IRA concept, individuals can switch from one type of IRA to another.

The Internal Revenue Service strictly limits how much money people can put into such accounts. The majority of individuals who are less than 50 are not permitted to contribute over $5,500 each year as of 2016. These limits become higher once the holders attain an age greater than 50. They call this “catch up contributions,” and the limits are typically raised by $1,000 to $1,500 more in this decade immediately before holders reach retirement age.

Practically all individuals are allowed to make contributions each year to a traditional form of IRA. So long as either the holder or spouse earns taxable income and is less than 70 and a half years old, they can participate.

The various kinds of IRAs are important to understand. A ROTH IRA does not provide tax deductions on contributions. There are also income restrictions which in 2016 amounted to under $184,000 for married filing jointly families or $117,000 for single heads of households or those who are married filing separately and not living with their spouses.

Both SEP and SIMPLE IRAs apply to only small business owners and the self employed. Only employers who claim fewer than 100 employees can set up these SIMPLE IRA accounts. Any individual who possesses freelancing income or who owns a business can open an SEP IRA.

While individuals can always withdraw their contributions (and even earnings) at any point once they have deposited them to their IRAs, there are penalties if they are less than 59 and ½ years old. The penalty is an extra 10 percent above the that-year tax bracket of the individuals who take distributions early. The government’s point is to discourage people from utilizing their retirement accounts like ATM machines or credit cards.

The term 'Rollover IRA' is included in the Investments edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.