They can make you want to rollover

Financial Life Planning for Busy Parents

IRAs: They can make you want to rollover

Host Matt Robison asks me this week about his rollover IRA. In an enlightening episode for us both, you will learn the ins and outs of Individual Retirement Accounts (IRAs) including the different types, rollovers, and the strategic moves you can make to optimize the tax benefits of these accounts. While I’d have thought the answers were all in the name, it turns out IRAs are not nearly as intuitive as I believed them to be.

Individual Retirement Account: IRA

There are many different types of IRAs, from rollover to Roth, traditional to back door, and everything in between. The one key thing to remember is that they all share a common thread—they end in ‘IRA.’ Each Individual Retirement Account comes with its own set of rules for things like transfers, withdrawals, and contributions, and has its own tax implications. We’ve gone over these in previous episodes, such as the Clean Back Door IRA, Traditional vs. Roth, 529 to Roth, and the oldie but goodie SEP-IRA vs. Solo 401k.

Consolides IRAs and 401(k) for Simplicity

In this episode, Matt shares his personal experience of rolling over an IRA from one financial institution to another. Seems like it would be a straightforward process, right? Not exactly. First, we talk about the challenges Matt faced as he attempted to ensure a successful rollover and then we dive into the importance of careful consideration when managing accounts tied to previous employers.

So, where to begin? Consider consolidating multiple IRAs into a single rollover IRA for simplicity and ease of management. Do you have previous employer retirement accounts such as a 401(k) or 403(b)? You could also transfer those funds into one account so that you can maintain centralized control over older, tax-deferred funds. But be careful: there are reasons to leave them in that 401(k)! So make sure to consider the consequences (Clean Back Door Roth)

Tax Benefits

Speaking of taxes, IRAs are designed to give you tax benefits. That is why putting savings into these accounts, versus your checking, savings, and brokerage accounts is so important. Decide how much liquidity you need (for instance, an emergency fund) then put the rest in a place where it will make you more money.

What place is that? Grab your employee handbook and figure out your options. Employer benefits are often overlooked but usually offer excellent ways to make the most from your savings. Google your yearly contribution limits for IRAs. They vary by age and by year, so once you have the info you need, make the transfer. If you are just starting this process, you can look up your 2023 contribution limits and those for 2024 and fund both accounts before April 15, 2024 (tax day). Then, set a calendar reminder for Q1 2025 to get ahead of your IRA funding and be sure you aren’t missing opportunities.

The bottom line is that IRAs are a great place to put your savings because of the many tax advantages. With a little bit of homework, you can make a lot more from your savings than leaving it sitting in accounts with no real benefits.