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Not only are you permitted to rollover a qualified IRA plan distribution to another plan or to a traditional IRA, but you may also rollover the distribution to a Roth IRA. If you choose this option, however, you are technically converting the rollover IRA assets to a Roth IRA and all of the usual rules for Roth IRA conversions will apply.
One of the most confusing parts of an IRA rollover is the difference between the many types of retirement accounts and the taxation involved. This can lead to some complications, especially when you’re dealing with rollover IRA to Roth IRA conversions. One of the first things you’ll need to understand about Roth IRA rollover is that the funds that are invested in the account have already been taxed, whereas in a traditional IRA rollover, the money has been invested without any taxes removed. For this reason, if you’re doing a Roth IRA transfer from a traditional account, you’ll have to ensure that the necessary taxes are withheld.
With the legislative changes taking place in 2010 for Rollover IRA/Roth IRA Conversion, many people are considering rollover their existing IRAs to Roth IRAs. Although there are some limitations, chances are your funds are eligible for a rollover IRA/Roth IRA conversion.
If you’re looking to rollover your IRA into a Roth IRA, you might be worrying about the amount of taxes you’ll need to pay when you make this rollover. Of course, your tax bill really depends on the situation of your rollover IRA. In traditional IRA’s rollover, the money that’s contributed to your account is taken out of your check before taxes are ever applied. When you take the money out during your retirement, it will be taxed accordingly. However, with a Roth IRA rollover, contributions are already taxed when they’re put into the account, so that when you take a Roth IRA distribution, it isn’t taxed.
To take advantage of the opportunity to pay your taxes owed in two parts, you must request a direct rollover if your funds are being rolled over from a traditional IRA to a Roth IRA. A direct rollover is a transaction wherein your funds will be rollover directly between your current IRA and your target (or new) Roth IRA. You will never receive physical possession of the funds; if a check is issued, it will be paid directly to the trustee or manager of the Roth IRA account.
Legal changes that have taken place in 2010 are making Roth IRA conversions and rollovers more attractive to investors than ever. If you’re one of these Rollover IRA/Roth IRA investors, you’ll need to carefully consider the tax implications of rolling over to or converting to a Roth IRA before making any rash decisions that could affect your financial future.
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