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Decide on a Roth or traditional IRA

Choosing an IRA for your rollover depends on your specific goals along with a few other factors, such as your taxes, earned income, and age.

Eligibility


Which type of IRA can I use for my rollover?

ROTH IRA

You must roll over into a Roth IRA (tax-free) if you were previously investing in a Roth 401(k) or Roth 403(b) where you worked.

You can also roll over into a Roth IRA if you were previously investing in a traditional 401(k) or 403(b), but this will be considered a Roth conversion and you'll have to pay taxes on any pre-tax contributions and all earnings that you convert.

TRADITIONAL IRA

You can roll over into a traditional IRA (tax-free) if you were previously investing in a traditional 401(k) or 403(b) where you worked.

You can't roll over into a traditional IRA from a Roth 401(k) or Roth 403(b).


Is there a limit on how much I can roll over?

ROTH IRA

While there's no maximum limit on how much you can roll over, you must meet certain minimum investment requirements.

TRADITIONAL IRA

While there's no maximum limit on how much you can roll over, you must meet certain minimum investment requirements.

Additional contributions


Can I contribute more to the IRA after my rollover?

ROTH IRA

Yes, but the amount of your contribution can't exceed the amount of income you earned that year (or that your spouse earned, if you're not working anymore).

You're also subject to annual Roth IRA limits ($6,000 for the 2020 tax year and $6,000 for the 2021 tax year. If you're age 50 or older, $7,000 for the 2020 tax year and $7,000 for the 2021 tax year). And those limits are reduced—and gradually phase out—as your modified adjusted gross income increases. Also, there are no age limits on Roth IRA contributions.

Please note: There may be special tax considerations when you combine rollover assets with new contributions in one account, otherwise known as commingling.

TRADITIONAL IRA

Yes. Effective for 2020, there is no age limit to open the IRA or contribute to it. For 2019 contributions and earlier, no contributions were allowed for years you were age 70½ or older.

Also, the amount of your contribution can't exceed the amount of income you earned that year (or that your spouse earned, if you're not working anymore). In addition, you're subject to annual traditional IRA limits ($6,000 for the 2020 and 2021 tax years. If you're age 50 or older, $7,000 for the 2020 and 2021 tax years).

Please note: There may be special tax considerations when you combine rollover assets with new contributions in one account, otherwise known as commingling.


Can I deduct future contributions on my taxes?

ROTH IRA

No.

TRADITIONAL IRA

Possibly—it depends on whether you or your spouse is already covered by a retirement plan at work.

If either of you are, the amount of your deduction, if any, will depend on your income.

Details are provided at irs.gov:

If you are covered by a retirement plan at work

If you aren't covered by a retirement plan at work

If you are covered by a retirement plan at work

If you aren't covered by a retirement plan at work

Withdrawals


Are there required minimum distributions (RMDs)?

ROTH IRA

No.

TRADITIONAL IRA

Yes, RMDs must start at age 72 (age 70½ if you attained age 70½ before 2020). However, due to the CARES Act of 2020, if you've reached RMD age, you do not have to take your RMD for 2020 if you don't want to.


Will I pay taxes on withdrawals?

ROTH IRA

You'll never pay taxes on withdrawals of your contributions.

And you won't pay taxes on withdrawals of your earnings as long as you take them after you've reached age 59½ and owned the account for at least 5 years.*

TRADITIONAL IRA

You'll pay ordinary income tax on withdrawals of all earnings and on any contributions you originally deducted on your taxes.


What's the penalty if I take a withdrawal before I reach age 59½?

ROTH IRA

There are no penalties on withdrawals of your contributions.

There's a 10% federal penalty tax on withdrawals of earnings unless an exception applies.

TRADITIONAL IRA

There's a 10% federal penalty tax on withdrawals of both contributions and earnings unless an exception applies.

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Personal Investors

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REFERENCE CONTENT

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Modified adjusted gross income

An amount used to determine a taxpayer's IRA eligibility. Generally, it's the taxpayer's adjusted gross income calculated without certain deductions and exclusions.

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Contribution

A percentage of your salary that goes directly into your 401(k) or 403(b) account, or the money you put into your IRA.

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Earnings

The money you make on your 401(k), 403(b), or IRA savings for a specified period of time, minus the costs and expenses.

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Minimum investment requirements

You can invest in any Vanguard Target Retirement Fund with as little as $1,000. You'll need $3,000 to buy most other Vanguard mutual funds, though there are some with lower or higher minimums.*

And you can invest in any ETF (exchange-traded fund) for the price of 1 share, which will vary throughout the day.

Other companies' funds may have different minimums, so be sure to check their prospectuses. And like ETFs, minimums for individual stocks, CDs (certificates of deposit), and bonds are based on their current market prices.


footnote*Minimum initial investment requirements for most mutual funds range from $1,000 to $100,000 depending on the fund and the share class, but some may be higher. Details are provided in each fund profile.

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Exceptions

Distributions received before you're age 59½ may not be subject to the 10% federal penalty tax if the distribution is due to your disability or death; is distributed by a reservist who was ordered or called to active duty after September 11, 2001, for at least 180 days; is part of a series of substantially equal periodic payments taken under IRS guidelines; is for the birth or adoption of a child (up to $5,000 per child distributed within 1 year of birth or adoption); or is for certain unreimbursed medical expenses, an IRS levy, or if you left your job during or after the year you turned age 55.

Coronavirus related distributions (CRDs) to qualified individuals (taken on or after January 1, 2020 and before December 31, 2020) are not subject to the 10% early withdrawal penalty.