What is an IRA Rollover?

A rollover is a tax-free distribution of cash or other assets from one retirement plan which is then reinvested in another retirement plan.  The contribution to the second retirement plan is called a “rollover contribution.”

In general, the following types of plans allow rollovers:

  • A traditional IRA
  • An employer’s qualified retirement plan for its employees
  • A Section 457(b) eligible governmental pan
  • A Section 403(b) plan
  • A Roth IRA (very limited – see IRS Publication 590)
  • A designated Roth Account within a plan (limited – see IRS Publication 590)

Reasons for Rollovers

When a participant takes a distribution (other than qualified Roth distributions or after-tax distributions), it is not only subject to current income tax, it may be subject to a 10% IRS penalty if the participant is underage 59½. Furthermore, if a participant under age 55 receives a distribution upon leaving employment, the 10% penalty tax may also apply. However, when a participant rolls a distribution over, the income tax is deferred, so the assets can continue to grow tax deferred.
Distributions from a SIMPLE IRA within the first two years of participation will be subject to a 25% additional tax.

Most workers will have four options for their retirement plan assets when they leave an employer:

  1. Leave the assets in the prior employer’s plan
  2. Roll the assets to a new employer’s plan (if continuing to work and plan is available)
  3. Roll the assets to an IRA
  4. Cash out the retirement savings

Determining which option is best can be challenging for individuals.  There is no “one size fits all” solution. The best choice will vary depending upon an individual’s unique financial needs and savings objectives.

Many workers have chosen to roll over their savings from their prior employer’s plan into an IRA. IRAs currently hold $7.3 trillion, representing a substantial portion of overall retirement savings in the U.S. Rollovers from employer plans are the most significant source of dollars flowing into IRAs.  But an IRA rollover is not the only option and it may not be the best choice for an individual.  Regulatory agencies, including the Financial Industry Regulatory Authority (FINRA), the regulatory agency that oversees broker dealers, have emphasized how important it is for workers to understand all of their options and evaluate multiple variables when deciding whether to roll assets to an IRA.

The IRA-to-IUL Conversion Strategies

Converting retirement funds from a tax-deferred status to a tax-free status is nothing new. Over the past decade, more and more Americans – helped by financial professionals – are realizing deferring taxes may not be in their best financial interest.
In the past, most Traditional IRAs were converted into tax-free Roth IRAs. Today, funds from a growing
number of IRAs are being placed in Indexed Universal Life (IUL) insurance policies. One potential reason: IUL can provide four powerful benefits to today’s savers:

  • The power of indexing to deliver growth potential with protection from market losses1
  • Tax-free supplemental income through policy loans2
  • Access to funds with no market-value adjustment
  • A legacy for beneficiaries above the account value

Thanks to these benefits, IUL has become a key component of holistic planning for a growing number of
Americans. Many financial professionals understand that IUL can deliver a package of features not found in other savings vehicles.

Click Here for the brochure, IRA-to-IUL Conversion Strategies.

  1. Indexed universal life insurance is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index. The index used is a price index and does not reflect dividends paid on the underlying stocks.
  2. Policy loans are not generally subject to income tax unless the policy is classified as a modified endowment contract (MEC) under IRC Section 7702A. Policy loans reduce available cash values and death benefits. Tax laws are subject to change. Please consult a qualified tax professional about your individual situation.