Can Earnings From After Tax Money Be Rolled Over to Another Retirement Account?
- A rollover takes money from one qualified plan and moves it into another. There are two types of rollover procedures, an indirect rollover and a direct rollover. Direct rollovers are akin to a transfer, where funds move from one IRA custodian to the other directly. If initiated from the original IRA, this is considered a rollover, which can only be done once per year. An indirect rollover sends a check to the participant who has to then re-deposit the money into the new rollover IRA within 60 days. Complicating indirect rollovers is 20 percent mandatory federal withholding. To complete the rollover and prevent irreversible taxes and penalties, 100 percent of the value needs to be redeposited.
- A non-deductible IRA may be moved into a Roth IRA with a Roth conversion conducted. Since the principal in the non-deductible IRA is after-tax dollars, the IRS does not double tax the money. Only the earnings are added to gross income to satisfy the conversion amount. Moving the non-deductible IRA funds into a Roth changes the account from tax-deferred to completely tax free as long as the IRA owner holds the IRA for five years and until age 59 1/2 before taking distributions.
- Some employer plans, such as 401k and 403b plans, allow IRA rollovers into the employer's plan. This is not the norm and while it is authorized by the IRS, not every plan administrator adopts the policy. Participants benefit from this option because IRAs have no loan provisions whereas employer plans often do. Participants can borrow 50 percent of account assets up to $50,000 with interest repaid to themselves, no credit check and repayments made via payroll deductions. However, only fully deductible IRAs can be rolled into employer-sponsored plans.
- When considering any rollover, look at the costs to leave one IRA custodian and the costs to enter into a new investment with the new rollover custodian. Reasons to move assets include investment objective changes that can't be satisfied at your existing custodian, dissatisfaction with custodial services or investment performance. The IRS allows many types of investments owned in IRA accounts but not every custodian is required to offer all. If you are happy with the service you are getting, ask your custodian about other investment options to reduce the paperwork and avoid accidentally generating a taxable event through an indirect rollover.
