Traditional and Roth IRAs, rollovers and conversions

Key Points

  • Traditional and Roth IRAs offer tax advantages and a wide choice of investment options.
  • You can evaluate the potential benefits and risks of a rollover from a 401(k) plan to an IRA. Consult with your advisor to discuss your individual situation.
  • An individual retirement account (IRA) can supplement your workplace retirement plan and provide an easy way to save for a confident retirement.

Contributing to a traditional IRA or Roth IRA may generate either tax-deferred or tax-free growth on the money you contribute. These earnings are then reinvested into your account and may generate even more earnings.

Traditional and Roth IRAs

There are two primary types of IRAs – Traditional and Roth. Each offers different tax advantages and a wide variety of investment choices.

You can choose one or both depending on your tax situation and income, but all IRAs together are subject to the combined contribution limit.

  • Traditional IRAs may allow you to receive a tax deduction equal to your contribution. The deductibility of a contribution is subject to income limitations depending on if you or your spouse are covered by a retirement plan at work. Distributions of tax-deductible contributions and earnings are taxed as ordinary income when withdrawn.
  • Roth IRAs are always funded with after-tax contributions and you will not receive a tax deduction. Your income must be under certain limits to be able to contribute. Qualified distributions are tax-free when withdrawn.

You can make contributions throughout the year or in a lump sum by the contribution deadline (usually the tax return due date — not including extensions — in the following year). Yearly contribution limits are subject to change.

Workplace retirement plan rollovers

If you've changed jobs or recently retired, you may have multiple retirement plans with different providers. You could consider a rollover from an existing workplace retirement plan to an Ameriprise® IRA which may provide you with a more complete picture of your savings for retirement.

A workplace retirement plan rollover:

  • Provides personal control over the investment of your retirement assets
  • Allows a greater range of investment options than many employer retirement plans
  • May provide more distribution flexibility than an employer plan
  • Is not subject to a mandatory 20% withholding when rolled directly to an IRA
  • Provides flexible beneficiary and estate planning options
  • Maintains tax-deferred status of the account
  • Sometimes you can even consider a rollover of funds while you are still working

However, there are also scenarios where it may make sense to leave assets in an employer plan. Some advantages to leaving assets in an employer qualified plan may include:

  • Special tax treatment for an in-kind distribution of appreciated employer stock as part of a lump sum distribution

  • No 10% penalty for withdrawals if you leave your employer in the year you turn 55 or later*

*Certain public safety workers in governmental plans, corrections officers and private sector firefighters who stop working in the year they turn age 50 or attain 25 years of service can avoid the 10% early withdrawal penalty and 457(b) plans don’t have a 10% early withdrawal penalty at any age.

  • Protection of assets from creditors; assets in ERISA qualified plans are protected under federal law while IRA asset protection outside of bankruptcy depends on state law

  • Access to low-cost investments

Rollover assets to an IRA while still employed

You may be able to rollover assets from your workplace 401(k) into an IRA while you’re still employed. Ask your advisor to help you explore the pros and cons of an in-service IRA rollover strategy before you make your decision.

Roth IRA conversions

A Roth IRA offers a number of benefits that are not available with a traditional IRA or other pre-tax retirement plans, including:

  • Potential tax-free growth and withdrawals
  • Assets are passed on to beneficiaries tax free (if conditions are met)
  • No required minimum distributions for the Roth IRA owner (non spouse beneficiaries are subject to RMDs)

A conversion of a pre-tax retirement plan to a Roth IRA is generally taxable in the year of the conversion, so it is important to weigh the costs and benefits of a Roth IRA conversion. Consult your tax advisor to learn more about the pros and cons and to help you determine if a Roth conversion is right for you.

Take the next step

Contact an Ameriprise financial advisor today to learn more about your IRA, rollover and conversion options.

Related Information

Learn more about investments and risks

Understanding investment terms and concepts

This information is provided only as a general source of information and is not intended to be used as a primary basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of professionals, as appropriate, to evaluate any specific information or advice.
Be sure you understand the potential benefits and risks of an IRA rollover or transfer before implementing. As with any decision that has tax implications, you should consult with your tax adviser prior to implementing an IRA rollover or transfer.
Ameriprise Financial Services, LLC, and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Securities offered by Ameriprise Financial Services LLC. Member FINRA and SIPC.