Roth IRA

A Roth conversion is when you move funds from a traditional IRA to a Roth IRA. With a Roth conversion, you pay taxes now to have access to tax-free distributions in the future, as well as other benefits Roth IRAs offer. But, once a traditional IRA is converted to a Roth IRA, you can’t undo this action.

While there are no eligibility requirements for a Roth conversion, there are several factors to consider when determining whether a Roth conversion makes sense for you, including your current tax rate versus your expected tax rate in retirement, your ability to pay taxes on the conversion, when you need to access your funds, your current mix of pretax and after-tax assets, and your desire to leave a tax-free inheritance for your heirs. A financial advisor can help you determine whether a Roth conversion is a good option for you.

You can distribute the contributions you made at any time without taxes or penalties. If it’s been at least five years since you first funded a Roth IRA and you’re 59½ or older, you can also distribute your earnings tax- and penalty-free.* However, if you don't meet both criteria, a distribution of earnings may be subject to taxes and/or a 10% penalty (see next question for possible penalty exceptions).

Per the IRS, the 10% penalty is waived for early IRA distributions if you:

• Inherited the IRA after the original account owner died.
• Are disabled or terminally ill.
• Take distributions in substantially equal payments over your life expectancy.
• Have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
• Use the distribution to pay for medical insurance premiums due to unemployment.
• Use the distribution for qualified higher education expenses.
• Use the distribution to build, buy or rebuild a first home (up to $10,000).
• Use the distribution to pay for expenses related to the birth or adoption of a child (up to $5,000 taken within one year following the event).
• Are a reservist called to active duty after Sept. 11, 2001.
• Use the distribution to satisfy an IRS levy.
• Are impacted by a qualified disaster and take the distribution within the required timeframe (up to $22,000 lifetime limit).

One of the main differences is the way contributions and withdrawals are taxed. Roth IRA contributions are made with after-tax dollars and future, qualified withdrawals are tax free. Traditional IRA contributions are generally made with pretax dollars, earnings grow tax deferred, and future withdrawals are taxed like income.

Another difference is required withdrawals. If you have a traditional IRA, the IRS requires you to withdraw a minimum amount each year when you reach 73, known as a required minimum distribution (RMD). A Roth IRA has no RMDs.

See Traditional IRA vs. Roth IRA for more details.

A 401(k) plan through your employer is designed to allow you to contribute a percentage of your salary for retirement savings. Employer plans may offer a traditional 401(k) and a Roth 401(k) for employees. Like an IRA, a traditional 401(k) is funded with pre-tax dollars and distributions are taxed as ordinary income, while a Roth 401(k) is funded with after-tax dollars with the potential for tax free withdrawals in the future.

With a 401(k), your employer makes several decisions on your behalf — where your account is held, when you’re eligible to contribute, what investment options and services are available to you, and when you can take distributions from your account, to name a few. 401(k) plans are generally less expensive than IRAs and can offer certain benefits that are unavailable to IRAs, such as employer matches, the ability to borrow against your assets, and the ability to take penalty-free withdrawals beginning at age 55 if you meet certain criteria. Unlike with Roth IRAs, there are no income limits for Roth 401(k) contributions, but you generally can’t access your contributions at any time like you can with a Roth IRA. You also have to take required minimum distribution (RMDs) from a Roth 401(k) when you turn 73, although this requirement will be eliminated in 2024 as a result of the SECURE 2.0 Act.

A Roth IRA is an individual account you contribute to and manage. It offers you more control and choice over where and how your contributions are invested as well as when you can access your funds. These accounts aren’t tied to your employer and are transferable between institutions at any time. If your 401(k) plan does not offer a Roth option, a Roth IRA can help you diversify the tax treatment of your assets, giving you greater flexibility to manage your taxes in retirement.

Additionally, if you want to maximize your retirement savings, you can contribute up to the annual limits for your 401(k) and a Roth IRA as long you meet the eligibility requirements.

You generally must meet two criteria to be able to roll over your employer retirement plan to an IRA:

• Your plan must allow you to take a distribution.
• The distribution must be eligible to be rolled over. Certain distributions, such as required minimum distribution (RMDs) and hardship distributions, aren’t eligible.

Additionally, Roth 401(k) assets may only be rolled over to a Roth IRA. Pretax 401(k) assets can be rolled over to a traditional or a Roth IRA. But, if you roll over pre-tax 401(k) assets to a Roth IRA, it’s considered a Roth conversion, and the amount that’s rolled over will be taxed.

It’s also important to know that there are differences between employer plans and IRAs. Make sure you understand your options before rolling over. A financial advisor can also help you determine whether rolling over makes sense for you.

Yes, you can transfer your IRA to another provider at any time without tax consequences or tax reporting as long as the assets move directly from your current IRA provider to your new IRA provider.

To move an existing IRA to Edward Jones, contact a financial advisor to help you determine the method best suited to your needs.