Need help understanding my IRA

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pepperjack13
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Need help understanding my IRA

Post by pepperjack13 »

I have a merrill-edge IRA account which is rollover IRA from my previous employer 401k. When I login, it says merril edge and I cant say if it is traditional or Roth IRA.

1. How do I find that out?
2. Which one is better?

I also have a 401K account with fidelity with current employer.

Thanks,
Pepper
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celia
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Re: Need help understanding my IRA

Post by celia »

Rollover IRAs are always Traditional IRAs. They are meant to hold assets that originated in an employer pre-tax plan so those assets can be rolled into a future employer plan. Some employer plans will only accept rollovers that originated in another other employer plan, so it is best to not make new contributions to the Rollover IRA. In other words, don’t co-mingle employer plan money (withheld from your paycheck and your former employer) with contributions you make directly. But you can make new contributions to a new Traditional IRA instead.

Neither Traditional nor Roth is “better”. The only difference between them is when they are taxed, Contributions to a Traditional IRA are not taxed, but later on, every dollar withdrawn will be taxed.

The opposite of this is the Roth IRA. Every dollar contributed is taxed, but later when the money is withdrawn, it will be tax-free (as long as the account was open at least 5 years and you are over 59.5).
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happysteward
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Re: Need help understanding my IRA

Post by happysteward »

celia wrote: Tue May 24, 2022 5:08 am Rollover IRAs are always Traditional IRAs.
Hi Celia, could you explain? If I have a Roth plan with my employer, say 401(k) , and roll it over upon leaving to my IRA…isn’t that a characterized as Roth rollover IRA?
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HeelaMonster
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Re: Need help understanding my IRA

Post by HeelaMonster »

The tax status of your employer plan should be maintained when rolled over to a new custodian. Thus, a tax-deferred 401k (pre-tax contributions) would roll over to a traditional IRA, and a Roth 401k (post-tax contributions) would roll over to a Roth IRA. In other words, it depends on how it started out (under your original employer plan), and you don't get to just choose. Once rolled over, then you may have some choices... like whether it makes sense to convert from tax-deferred to Roth.

But you should certainly be able to confirm current status with current custodian. The account should be labeled as traditional or Roth IRA.
Last edited by HeelaMonster on Tue May 24, 2022 7:46 am, edited 3 times in total.
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retiredjg
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Re: Need help understanding my IRA

Post by retiredjg »

If it is called a rollover IRA, it is a traditional IRA.

If the account is not called "rollover IRA" or "IRA" or "Roth IRA", it may have accidentally been rolled over into an ordinary taxable account.

A Roth IRA is always called a Roth IRA (whether it is a rollover or not).

Roth and traditional IRAs are both good. Neither is better than the other.
Mr. Buzzkill
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Re: Need help understanding my IRA

Post by Mr. Buzzkill »

The presumption is that a login session that reveals an account labeled “IRA” is a traditional, self-contributing IRA. If the account was a Roth IRA, it would be labeled “Roth IRA”

My brokerage account main page lists multiple IRAs for me: “IRA”, “Roth IRA”, “Inherited IRA”, “Rollover IRA”

By selecting one, I can drill into the balance, holdings, performance, etc. of each separate from the other.

As others may have mentioned, you can transfer retirement plan assets like 401k balances into an existing traditional IRA to which you have already contributed money without an employer-sponsored plan. But taking possession of the retirement plan assets that you intend to roll over into another employer retirement plan can be and are best segregated into a separate rollover IRA to keep the accounting simple, if you have to segregate the assets for some reasons or desire to eventually roll the formerly employment plan assets into a new employer’s retirement plan.

Personally, I want all my 401k assets from previous employment moved into my total control in an IRA (more investing options, lower costs, more flexibility in rebalancing, etc.) instead of rolling them into a new employer-sponsored plan.

Side note: many people confuse “transfer” and “rollover”. Technically, they are different transactions. One can transfer assets directly from IRA at an institution to an IRA at another institution (while keeping the post/pre-tax characterization of traditional/Roth IRA) without taking direct possession of the money. At one point in time, it was not unusual for people moving IRA assets to new institutions to temporarily take possession of the assets in, say, a regular checking account, because the law allowed that if the money was to be rolled over to a new IRA within 60 days, IIRC (someone correct me if I’m wrong). But I think that stopped being common, or even possible, either because of new legislation or new withholding requirements (any withdrawal to personal possession was technically a taxable event for the year’s tax reporting unless a rollover to new tax-deferred account was completed within 60 days).

Hope that helps.
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celia
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Re: Need help understanding my IRA

Post by celia »

happysteward wrote: Tue May 24, 2022 6:37 am Hi Celia, could you explain? If I have a Roth plan with my employer, say 401(k) , and roll it over upon leaving to my IRA…isn’t that a characterized as Roth rollover IRA?
First of all, the employer contributions had to go into the pre-tax part of the 401(k). But maybe you converted them to the post-tax (Roth) part each year…?

There is no such thing as a Roth Rollover IRA as an account type. But a “Roth Rollover” is a transaction where you are moving post-tax money.
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celia
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Re: Need help understanding my IRA

Post by celia »

Some employer plans allow you to keep the money in the plan after you leave. You might want to leave the money there if the investment choices are good and low cost. If the employer plan has both a pre-tax part and a post-tax part (Roth} and you want to take the money with you when you leave, the pre-tax part needs to be rolled over to another pre-tax (ie, tax-deferred) account and the post-tax part need to be rolled over to another post-tax (ie, Roth) account.

If you are changing employers and the new one also has a 401K that can hold pre-tax and post-tax money, you can transfer both parts of the original employer account to the respective parts of the new employer plan. But if the new employer only has a pre-tax plan, you will have to roll the post-tax part of the old plan to a Roth IRA to maintain the post-tax status. (You wouldn’t want to pay taxes on that money again, would you?). When you leave an employer, you can also roll the respective parts of the employer plan to a Rollover IRA and a Roth IRA.

This is the IRS Rollover Chart that shows the permissible types of accounts each retirement account can roll into. Note that some of the rollovers are combined with Roth conversions. This is where you can change all (or part) of a rollover from pre-tax (tax-deferred) to post-tax (Roth). In these cases, you will owe taxes on all the money that is converted and it will be reported on your tax return the following year during January to April.
Alan S.
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Re: Need help understanding my IRA

Post by Alan S. »

happysteward wrote: Tue May 24, 2022 6:37 am
celia wrote: Tue May 24, 2022 5:08 am Rollover IRAs are always Traditional IRAs.
Hi Celia, could you explain? If I have a Roth plan with my employer, say 401(k) , and roll it over upon leaving to my IRA…isn’t that a characterized as Roth rollover IRA?
You could call it that, but the popular use has never caught on.
Prior to 2001, rollover IRAs were referred to as "conduit IRAs", as their prime purpose was to hold former qualified plan assets until they could be rolled back into a new qualified plan, although many never were. Following all the portability improvements in 2001, these conduit IRAs were gradually referred to as "rollover IRAs".

The main reason the term "Roth rollover IRA" never caught on relates to the former purpose of conduit IRAs providing a holding account until a former plan could be rolled into a new employer plan. However, a Roth IRA can NEVER be rolled into an employer plan (including a Roth 401k), therefore the Roth IRA could never be a conduit account. Instead, it is the final destination.

But if you look at creditor protection rules under the 2005 Bankruptcy Act, "rollover IRAs" have unlimited dollar protection in bankruptcy, and in this paragraph Investopedia refers to a "rollover Roth IRA" in the same context as a rollover (T)IRA:
Special Protection for Rollover IRAs
For the purposes of BAPCPA, a rollover IRA is a traditional or Roth IRA account that was originally funded through a transfer from a qualified retirement plan. Qualified retirement plans include standard 401(k) plans, traditional pension plans, and certain profit-sharing plans. Under BAPCPA, a properly executed rollover IRA originating from a qualified retirement plan is fully shielded from creditors in a bankruptcy.

Keep in mind that once the rollover of assets is complete, a rollover IRA is not essentially different from any other traditional or Roth IRA—apart from the source of the assets. To ensure full protection for a rollover IRA originating from a qualified retirement plan, it is a good idea to create a separate IRA account for the rollover assets distinct from any other existing traditional or Roth IRA.
A rollover from a 401k to a Roth IRA in IRS terms is a "qualified rollover contribution", so the account is funded in exactly the same manner as a rollover IRA. But most likely it will never be referred to as a "Roth rollover IRA", likely because it can never be rolled into a different type of plan.
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