Understanding rollover vs. traditional IRA options 

As you advance in your working years, you’ll likely start looking into retirement products. However, doing so efficiently is complicated, especially with economic uncertainty and volatile stock prices. Once people start down the retirement exploration path, one of the first questions many have is: What’s an IRA?

Individual retirement accounts (IRAs), including rollover and traditional IRAs, are some of the most popular options available to help workers save for retirement. In this article, we’ll discuss what you need to know about rollover IRAs and traditional IRAs so you can make an informed decision on which option is right for you. 

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What are traditional IRAs?

A traditional IRA is a type of individual retirement account that comes with tax advantages, such as the ability to grow your earnings tax-deferred, meaning you only pay taxes on your investment gains once you make withdrawals. 

Pros: 

• No income limits to open and contribute.
• Tax deductions on contributions depend on your filing status and income.
• Taxes are deferred until withdrawals are made.

Cons:

• 10% early distribution penalty if you withdraw money before age 59½ unless your withdrawal qualifies as an exception.
• Required minimum distributions start at age 73.
• Low IRA contribution limits: In 2024 and 2025, you can contribute up to $7,000 to a traditional IRA or $8,000 if you’re 50 or older.

Traditional IRAs are ideal for people looking to save for retirement while also reducing their current tax burden since certain contributions are tax-deductible. They’re also a good option if you expect your tax rate to be lower in retirement than it is currently, as taxes on your contributions are deferred until withdrawal.

What are rollover IRAs?

A rollover IRA is a type of account that permits you to transfer funds from a previous employer-sponsored retirement plan or IRA while maintaining the tax-deferred status of these assets. This can be done directly between financial institutions, allowing you to stay out of the handover and avoid potential tax implications and penalties. 

Pros:

• Offers more control over your portfolio and investment choices.
• Wider selection of investments and potentially lower administrative fees.
• Allows you to defer penalties and taxes.

Cons:

• Can complicate managing your savings if you have multiple plans consolidated into one IRA.
• The tax rate on amounts distributed from the IRA may be higher depending on your tax bracket during distribution years.
• Potential tax liability if you convert a traditional IRA to a Roth IRA.

Rollover IRAs may be a good option for people who are changing jobs or retiring and want to consolidate their retirement savings into a more flexible account. They can move money from an employer-provided retirement account, such as a 401(k), into an IRA without losing the tax-deferred status of their deposits.

These accounts are also ideal for people looking for more investment options and lower fees than their current employer-sponsored plans provide.

As for the disadvantages of rolling over a 401(k) to an IRA, the primary downside is the potential for higher fees due to the range of more sophisticated investment options.

Rollover IRAs vs. Traditional IRAs: Key differences

The differences between rollover IRAs and traditional IRAs are subtle but important. “Traditional” refers to the tax structure of an account, whereas rollover accounts are specifically designed to catch funds transferred from another account type.

Rollover IRAs and traditional IRAs have similarities, and in fact, some rollover IRAs are traditional IRAs. Below is a chart detailing the key similarities and differences between rollover and traditional IRAs, including IRA rollover rules. 

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How do you choose an IRA that suits your needs?

The first step is to decide between a traditional IRA and a Roth IRA based on your current and future tax situation. Traditional IRAs offer tax deductions on contributions, while Roth IRAs provide tax-free withdrawals in retirement. 

Next, you need to consider where to open your IRA, with options including banks, insurance companies, or brokerage firms. Each option has different benefits, including investment flexibility and guaranteed income options. 

It’s also important to consider the types of investments you seek — such as stocks, CDs, ETFs, and annuities — and how involved you want to be in the day-to-day decisions of your portfolio. A brokerage account might be the best option if you’re looking for investments without fees or commissions.

The last thing to be aware of is the fees and management costs. Opening an account isn’t always free, and you should pay close attention to account minimums.

Other types of IRAs

There are various types of IRAs to consider when determining the best IRA account for your retirement:

• Roth IRAs: An individual retirement account where contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free.
• Simplified Employee Pension (SEP) IRAs: An employer-sponsored retirement plan for self-employed individuals or small business owners enabling contributions to traditional IRA accounts.
• Salary Reduction Simplified Employee Pension Plan (SARSEP): A pre-1997 version of the SEP IRA, which has been discontinued for new plans, where employees could make pre-tax salary deferrals, similar to a 401(k), with employer contributions.
• Payroll Deduction IRAs: A traditional or Roth IRA through automatic deductions from an employee’s paycheck. The underlying IRA still follows the rules of a traditional or Roth IRA.
• Savings Incentive Match Plan for Employees (SIMPLE) IRAs: A plan for small businesses where employees contribute pre-tax dollars and employers match or contribute a fixed percentage.
  

A common concern people have regarding the main types of IRAs is the difference between a traditional IRA versus a Roth IRA versus a rollover IRA. The primary difference relates to contributions and withdrawals. With traditional IRAs, contributions are generally tax-deductible, reducing your taxable income for the year you contribute, and withdrawals are treated as ordinary income. 

With Roth IRAs, contributions aren’t tax-deductible, but they grow tax-free and can be withdrawn anytime without taxes or penalties. You can withdraw earnings tax-free and penalty-free after age 59½, as long as the account has been open for at least five years.

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This communication / article is for informational / educational purposes only.

It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.

The Gainbridge^® digital platform provides informational and educational resources intended only for self-directed purposes.

Individual licensed agents associated with Gainbridge^® are available to provide customer assistance related to the application process and provide factual information on the annuity contracts, but in keeping with the self-directed nature of the Gainbridge^® Digital Platform, the Gainbridge^® agents will not provide insurance or investment advice.

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