They're tax-advantaged, simple, and flexible. These three IRA features explain why for most people the question isn't whether to use an IRA but which one to choose, a Traditional or a Roth.
The information here can help you decide which is more appropriate for you. And remember - if you're leaving your current job, you need to decide what to do with the assets in your 401(k) or other employer saving plan. Be sure you're familiar with the advantages of a Rollover IRA before you make your choice.
Traditional and Roth IRAs
Both Traditional and Roth IRAs offer tax advantages. In choosing between the types, focus on which advantages can be more advantageous in your situation.
In general, Consider the Roth if
- You think you'll be able to contribute the maximum allowable amount each year.
- You're saving while in a low tax bracket but expect to be a higher bracket when you've retired.
- Your contributions to a Traditional IRA won't be tax deductible because your adjusted gross income is above the specified limit.
- You don't want to be locked in to taking distributions from the account during your lifetime. (And if you'd like the possibility of distributions to your heirs being tax-free.)
- You'd like to help ensure your heirs have maximum flexibility with account assets.
Consider the Traditional IRA if
- You're in a higher tax bracket when saving but expect a lower bracket in retirement.
- You exceed the Roth IRA income limits (see chart below).
Click here to take a quick look at comparative plan features, then do a more specific comparison using the interactive Calvert Roth vs Traditional IRA calculator.
Rollover IRA
In general, if you change jobs or retire, you have four options regarding assets you have in a qualified employer retirement plan like a 401(k) or in a 403(b):
- Roll over the assets to a Rollover IRA
Advantages include keeping assets tax-deferred, having a wider range of investment choices, consolidating retirement assets, and exercising more control over account assets.
- Leave assets in the plan if permitted
This can be an appropriate choice if you are happy with how the plan is run, the investment options offered by the plan, and the rules governing withdrawals, distributions, etc.
- Move assets into a new employer plan, if permitted
Advantages include consolidating your retirement assets with one manager and possibly having more investment choice.
- Receive assets as a taxable distribution.
Tax consequences and possible penalties -- plus the loss of tax-deferred asset growth if you do not reinvest the assets in a tax-deferred account within 60 days -- can make this choice undesirable in most circumstances. (See table below.)
| Impact of Taxes and Penalties on a $10,000 Pre-retirement Distribution |
| Account Value |
$ 10,000 |
| Less 20% withholding for taxes |
- 2,000 |
| Amount of distribution check |
8,000 |
| -Less 10% premature distribution penalty*
|
-1,000 |
| Less additional income tax owed**
|
- 750 |
| Amount actually received after payment of income taxes and penalty |
$6,250 |
If you receive assets directly from an employer plan, you have just 60 days in which to reinvest them in another employer plan or in a Rollover IRA.
A direct rollover is the simplest way to move assets from an employer plan to a Rollover IRA. The check is written directly to the company where you open your Rollover IRA. With an indirect rollover, you receive the check and must see that it's put into the Rollover IRA account. The disadvantage is that the employer must withhold 20% for taxes and you would have to make up the 20% out-of-pocket if you wanted the entire amount to remain tax-deferred.
Get help from a financial advisor
Your decision about how to handle assets from your employer retirement plan is very important. In addition to the tax consequences and investment issues you'll have to consider, you'll also want to look ahead and make sure your decision won't limit your financial options in the future.
Your financial advisor or a Calvert representative will be happy to provide you with more information. If you don't have a financial advisor, use Calvert's Advisor FinderTM service to locate one near you or call Calvert at 1.800.368.2748 to get names of financial professionals to interview.
Coverdell Education IRA
It is not a retirement planning tool, but the Coverdell Education IRA is worth mentioning in connection with Traditional, Roth, and Rollover IRAs. The reason: if you are like most people, you're trying to save for multiple purposes at the same time. The Coverdell is a tax-advantaged savings account designed for education funding, and you can contribute to it even if you max out contributions to an employer retirement plan and an IRA.
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