Rollover IRA Brokerage Account – A rollover IRA brokerage account is a type of retirement account that allows you to transfer your savings from an employer-sponsored plan (such as a 401 (k), 403 (b), or 457 plan) or another IRA to a new account with a different broker. A rollover IRA brokerage account can help you avoid taxes and penalties, diversify your investments, and access more features and services.
In this article, we will explain what a rollover IRA brokerage account is, why you might want to set one up, and how to do it in three easy steps.
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What is a Rollover IRA Brokerage Account?
A rollover IRA brokerage account is a special kind of traditional IRA that is designed to receive funds from other retirement accounts. A traditional IRA is a tax-advantaged account that lets you save and invest money for retirement. You can contribute up to $6,000 per year ($7,000 if you are 50 or older) to a traditional IRA, and your contributions may be tax-deductible depending on your income and filing status. Your earnings grow tax-deferred until you withdraw them in retirement when they are taxed as ordinary income.
A rollover IRA brokerage account has the same rules and benefits as a regular traditional IRA, except that it can also accept rollovers from other sources. A rollover is a tax-free transfer of funds from one retirement account to another. You can roll over money from an employer-sponsored plan (such as a 401 (k), 403 (b), or 457 plan) or another IRA to a rollover IRA brokerage account without paying any taxes or penalties, as long as you follow the IRS guidelines.
A rollover IRA brokerage account is different from a regular IRA account in that it is held by a broker, not a bank or a mutual fund company. A broker is a financial institution that acts as an intermediary between buyers and sellers of securities, such as stocks, bonds, mutual funds, ETFs, etc. A broker can offer you more investment options, lower fees, better customer service, and other features and services than a bank or a mutual fund company.
Why Set Up a Rollover IRA Brokerage Account?
There are several reasons why you might want to set up a rollover IRA brokerage account. Some of them are:
- To avoid taxes and penalties. If you withdraw money from an employer-sponsored plan or another IRA before age 59 1/2, you will have to pay income tax and a 10% early withdrawal penalty on the amount that was not rolled over. By rolling over your funds to a rollover IRA brokerage account, you can defer taxes and avoid penalties until you retire.
- To diversify your investments. If you have your retirement savings in one or more employer-sponsored plans or IRAs, you may be limited in your investment choices. For example, some plans may only offer a few mutual funds or target-date funds that may not suit your risk tolerance or investment goals. By rolling over your funds to a rollover IRA brokerage account, you can access a wider range of investment options, such as stocks, bonds, mutual funds, ETFs, etc., and create a portfolio that matches your preferences and needs.
- To access more features and services. If you have your retirement savings in one or more employer-sponsored plans or IRAs, you may not be satisfied with the fees, performance, service, or convenience of your current provider. For example, some providers may charge high fees for managing your account, offer poor returns on your investments, have limited customer support hours, or require you to fill out complicated paperwork. By rolling over your funds to a rollover IRA brokerage account, you can choose a broker that offers lower fees, better returns, more customer service options, and easier online access.
How to Set Up a Rollover IRA Brokerage Account?
Setting up a rollover IRA brokerage account is not difficult if you follow these three steps:
Step 1: Open a New Rollover IRA Account
The first step is to open a new rollover IRA account with the brokerage firm of your choice. You can do this online or by phone, depending on the broker. You will need to provide some personal information, such as your name, address, Social Security number, and beneficiary information. You will also need to select the type of account you want to open (e.g., standard, Roth, or inherited IRA) and the investment options you prefer (e.g., stocks, bonds, mutual funds, ETFs).
Some brokers may offer incentives for opening a new rollover IRA account with them, such as cash bonuses, free trades, or waived fees. You may want to compare different brokers and their offers before making a decision.
Step 2: Request a Rollover from Your Old Broker
The next step is to request a rollover from your old broker. You can do this by filling out a form online or by calling the customer service department. You will need to provide the account number and the name of the new broker where you want to transfer your funds.
There are two ways to roll over your IRA: direct or indirect. A direct rollover is when your old broker transfers the funds directly to your new broker without sending you a check. This is the preferred method because it avoids any taxes or penalties that may apply if you receive the money yourself.
An indirect rollover is when your old broker sends you a check for the amount of your IRA balance. You then have 60 days to deposit the check into your new rollover IRA account. If you fail to do so within the deadline, you will have to pay income tax and a 10% early withdrawal penalty on the amount that was not rolled over.
To avoid any complications, it is advisable to choose a direct rollover whenever possible.
Step 3: Confirm the Transfer of Funds
The third step is to confirm that the transfer of funds has been completed successfully. Depending on the broker and the method of transfer, this may take anywhere from a few days to a few weeks. You can check the status of your rollover online or by contacting the customer service representatives of both brokers.
Once the transfer is done, you should receive a confirmation statement from your new broker showing the amount and date of the rollover. You should also receive a Form 1099-R from your old broker reporting the distribution of funds from your IRA. You will need these documents for tax purposes.
Step 4: Manage Your New Rollover IRA Account
The final step is to manage your new rollover IRA account according to your retirement goals and risk tolerance. You can adjust your asset allocation, rebalance your portfolio, or make additional contributions as needed. You can also take advantage of any tools or services that your new broker offers, such as financial planning, investment advice, or educational resources.
Remember that a rollover IRA is subject to the same rules as a regular traditional IRA. This means that you cannot withdraw money from your account before age 59 1/2 without paying a 10% penalty (unless you qualify for an exception). You also have to start taking RMDs when you reach age 72 (or 70 1/2 if you were born before July 1, 1949).
To avoid any complications, it is advisable to choose a direct transfer whenever possible.
Once the transfer is complete, you should receive a confirmation statement from your new broker showing the amount and date of the rollover. You should also receive a Form 1099-R from your old provider reporting the distribution of funds from your account. You will need these documents for tax purposes.
You can now start managing your new rollover IRA brokerage account according to your retirement goals and risk tolerance. You can adjust your asset allocation, rebalance your portfolio, or make additional contributions as needed. You can also take advantage of any tools or services that your new broker offers, such as financial planning, investment advice, or educational resources.
In conclusion, A rollover IRA brokerage account can be a smart way to take charge of your retirement savings and enjoy more flexibility and choice in your investments. By following these three steps, you can easily set up a rollover IRA brokerage account and continue saving for your future.
Rollover IRA Brokerage Account: Frequently Asked Questions (F&Qs)
Can I withdraw from a rollover IRA brokerage account?
Yes, you can withdraw money from your rollover IRA, but there are a few key rules to pay attention to before you do:
- Early withdrawal penalty: The U.S. Internal Revenue Service (IRS) has created a 10% penalty tax to discourage people from taking out their retirement money too soon. Once you reach age 59½, you avoid this penalty.
- Exceptions to the penalty: The IRS has provided exceptions to the 10% penalty before age 59½ for IRAs and other retirement plans, such as death, disability, unreimbursed medical expenses above 10% of adjusted gross income, etc.
- Roth IRA withdrawals—the five-year rule: For Roth IRAs—which are funded with after-tax money—there’s an additional rule you must meet to avoid the 10% penalty tax on account earnings, called the five-year rule.
Please note that withdrawing funds from an IRA and directing them to another retirement account is called a 60-day rollover. You’re limited to only one such “rollover” within a 12-month period, regardless of the number of IRAs you own.
Is a rollover IRA brokerage account taxable?
A rollover IRA is a type of retirement account that is funded by transferring, or “rolling over,” money from a previous employer’s retirement plan. Here are some key points about the tax implications of a rollover IRA:
- Tax-free rollover: If a rollover is done correctly, it is tax-free. However, an attempted rollover done incorrectly is usually included in gross income and taxed as ordinary income, except for any portion that was after-tax or nondeductible contributions.
- Early withdrawal penalty: There might be a 10% early distribution penalty added if you’re under age 59½.
- 60-day rule: If you receive the proceeds of your 401(k) to invest in a rollover IRA, it’s very important that you complete the process within 60 days. If you miss this deadline, you will be subject to taxes.
- Direct rollover: Usually, the smart way to move your 401(k) money to an IRA is through what is called a direct rollover. Your entire 401(k) balance is transferred directly into the IRA you have set up at a bank, brokerage, or fund complex. With a direct rollover, you will not owe any tax for making this move.
Is a rollover IRA brokerage account a Roth IRA?
A rollover IRA and a Roth IRA are both types of individual retirement accounts (IRAs), but they serve different purposes and have different tax implications.
A rollover IRA is an account that is used to receive assets from an employer-sponsored qualified retirement plan, such as a 401(k) or 403(b). It can be either a traditional IRA or a Roth IRA. The rollover contributions are not taxed and are not counted against your annual limit.
On the other hand, a Roth IRA is a retirement savings account into which you make after-tax contributions. Your contributions are not tax-deductible, but you can make tax-free withdrawals in retirement as long as you meet certain conditions.
So, a rollover IRA brokerage account could potentially be a Roth IRA if the assets rolled over were from a Roth 401(k) or similar account. However, it could also be a traditional IRA if the assets were rolled over from a traditional 401(k) or similar account. It’s always best to consult with a financial advisor to understand the specifics of your situation.