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For Individual Retirement Accounts, if the investor is at lower tax bracket now than expected retirement bracket, then Roth 401(k)/IRA is generally preferred. If the investor is at a higher tax bracket now than expected retirement bracket, then a traditional 401(k)/IRA is preferred. However, the Roth versions also have early/late withdrawal advantages.

The Roth version is better if the tax brackets are expected to be the same, and may be better even if one expects to be in a lower tax bracket upon retirement. The explanation is technical, but the basis idea is that the limits are set wrong - contributing $4,000 to a traditional IRA can confer about the same tax advantage as contributing much less to a Roth if the account will run over a lengthy period of time.

Rollover is a process whereby a financial instrument such as a CD is reinvested at maturity. It may also refer to the transfer of the balance of a 401k or IRA into another 401k or IRA account (i.e. rolling over a conventional IRA into a Roth IRA or a 401k from a former employer into a conventional IRA). When talking about Payday Loans, a roll-over can be referred to as what happens when a borrower does not have enough money to pay back the loan when it is due. The borrower then borrows more money and the same rules apply (i.e. interest).

What is a Rollover IRA?

It's a special kind of individual retirement account (IRA) specifically for transfers of money from employer-sponsored retirement plans, such as a 401(k). Rollover IRAs sometimes are referred to as conduit IRAs.

Direct and Indirect Rollovers

If you transfer money directly from a previous employer's retirement plan to a Rollover IRA, you won't have to pay taxes on the money until you withdraw it later (ideally after you retire). You can choose from a broad range of investments suited to your investing style and retirement goal, and you usually can transfer the money into a new employer's plan later if the new plan allows it. You also may be able to convert a Rollover IRA to a Roth IRA if you meet the requirements. If you convert to a Roth IRA, you will owe taxes on any contributions and earnings not previously taxed.

If the money is sent to you rather than to a Rollover IRA, your former employer must withhold 20% of the distribution as a prepayment of federal taxes. You still can roll the money over to a Rollover IRA, if you do it within 60 days. This is called an indirect rollover. You will either have to make up the 20% that was withheld or pay taxes on that amount, and you may owe additional tax penalties.

Contributions

It used to be that Rollover IRA money and IRA contributions could not be "commingled," or combined, if you planned to transfer your rollover money to a new employer's plan at a later date. But the 2001 Tax Act made the rules regarding rollovers more flexible.

Now IRA contributions generally can be rolled over to an employer-sponsored plan that allows it. If you are not sure your new plan allows transfers of IRA contributions or you are not sure what you will do with your rollover funds in the future, you may want to keep your rollover money and your IRA contributions in separate accounts.

If you do not plan to transfer your rollover funds to a new employer plan in the future and you would like to add contributions to your Rollover IRA, check with the investment company who is managing your account for their policy. You may have to transfer the money from your Rollover IRA to a new contributory IRA.

Earnings and Withdrawals

The rules for earnings and withdrawals for a Rollover IRA are the same as for a traditional IRA.

• Earnings grow tax deferred and are taxed at your ordinary income tax rate upon withdrawal.
• You must begin taking minimum distributions from a Rollover IRA beginning at age 70½.
• Early withdrawal penalties may apply for withdrawals prior to age 59½.
• Penalty-free distributions for special purposes may be permitted prior to retirement.

This information is for educational purposes only and is not intended as investment or tax advice.

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