Difference Between Traditional IRA and Rollover IRA?

It can be confusing when people use the phrases “traditional IRA” and “rollover IRA” separately, since in many respects these two types of individual retirement accounts are the same thing. If you’re in a situation where you’re trying to figure out how to either create or merge these types of accounts, it probably means that you’re coming from a situation where you have a preexisting pension or retirement plan through your employer and are seeking to transition between the accounts. Here’s an overview that may help:

Traditional IRA

A traditional IRA is the original type of individual retirement account initiated in 1986. Although there are nearly a dozen types of IRA, the traditional IRA is most often compared to the Roth IRA. The main factor that differentiates these two accounts is taxes. With the traditional IRA, you pay taxes when your funds are distributed under whatever income restrictions apply at that point in your life. On the other hand, the Roth IRA allows users to pay taxes on money as they deposit it, and then withdraw their balance tax-free upon retirement. The traditional IRA also has a mandatory deadline at which point you must withdraw your money, which is 70.5 years old as of 2011. Otherwise, the accounts have the same yearly maximum deposits allowed and operate very similarly. Other discrepancies do apply; contact your bank for further specifics.

Rollover IRA

When you have a pension plan through your employer that’s not an IRA, such as a 401(k), and you want to transition this account to a new or existing traditional IRA, this process and its results are known as the rollover or conduit IRA. When this happens, your account becomes defined as a traditional IRA in all legal and financial respects, and follows the same parameters outlined above. The reason that this separate account name exists is to differentiate it from account types that can’t bridge over to the traditional IRA.

Rollover to Traditional IRA: What You Should Know

You may only be able to complete a rollover once every fiscal year, and there might be a certain timeframe within which you must complete this transfer from when the funds become available to you. There are also certain deadlines established by the IRS by which you must rollover any funds to be filed along with your traditional IRA. It should be noted that these do count toward the annual maximum deposit, which is $5,000 for those 50 and younger or $6,000 otherwise as of 2011.

Author: TM Murphy is a professional writer who lives in NYC. She currently specializes in fashion, beauty, marketing and finance articles. TM Murphy has been writing full-time since 2006, when she graduated with a B.A. in English from Northeastern University.

Follow Me on Twitter

For Real Time Financial Tips and Updates

Related posts:

Share It

Pin It