A rollover IRA is used to receive funds rolled from outside custodians. This could be other IRAs, and also employer sponsored accounts like a 401(k). The Rollover IRA is essentially the same as a Traditional IRA, but there is one important factor to consider:
If you roll in funds from employer accounts to a Rollover IRA and nothing else is contributed, you retain the ability to roll the funds back out of the Rollover IRA and into a new employer plan in the future. However, as soon as you add an annual, Traditional IRA contribution to this account it becomes ‘Co-mingled’. When this occurs you lose the ability to roll it back into a future 401(k).
If you do find yourself both wanting to rollover a 401(k) and contributing to a Traditional IRA the solution would be to open two accounts at your custodian, one that receives 401(k) and a second account to receive your regular annual Traditional IRA contribution.
Opening a rollover and a Traditional IRA
Why would it matter?
If you co-mingle, you lose the option to use the rollover as a conduit between two 401(k) accounts. The importance here is the ‘option’ as it might be that your future employer has an inferior plan to what is on offer within a low cost IRA. But that said, even the worst 401(k) plans offer things that IRA’s do not. The two most important items are:
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If you roll in funds from employer accounts to a Rollover IRA and nothing else is contributed, you retain the ability to roll the funds back out of the Rollover IRA and into a new employer plan in the future. However, as soon as you add an annual, Traditional IRA contribution to this account it becomes ‘Co-mingled’. When this occurs you lose the ability to roll it back into a future 401(k).
If you do find yourself both wanting to rollover a 401(k) and contributing to a Traditional IRA the solution would be to open two accounts at your custodian, one that receives 401(k) and a second account to receive your regular annual Traditional IRA contribution.
Opening a rollover and a Traditional IRA
Why would it matter?
If you co-mingle, you lose the option to use the rollover as a conduit between two 401(k) accounts. The importance here is the ‘option’ as it might be that your future employer has an inferior plan to what is on offer within a low cost IRA. But that said, even the worst 401(k) plans offer things that IRA’s do not. The two most important items are:
- ERISA protection. The ERISA act of 1974 puts into place safeguards for the owner of a 401(k) that the owner of an IRA does not have. Important ones pertain to creditor protection on a Federal level. ERISA makes it harder for a 401(k) to be the subject of liens and litigation, whereas an IRA is afforded protection on a State level, which varies in strength.
- 401(k) required minimum distributions (RMDs) are not required while employed, whereas the same employee with a Traditional IRA would be required to take these distributions.
The post The Difference between a Rollover IRA and a Traditional IRA appeared first on Saverocity Finance.
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