Small business owners have many options when it comes to setting up a retirement plan for their business and employees. Previously, I had mentioned the SEP IRA as one of the more common choices. Another option is the the SIMPLE IRA. But don’t let the name fool you. When it comes to the rules of the SIMPLE IRA, I actually think it’s one of the most confusing when compared to the rest of the retirement plan options.
SIMPLE IRA stands for Savings Investment Match Plan for Employees. Often times I’ll refer to it as the “mini-401k” as it’s traditional used for employers with less than a 100 employees. In addition to that, the administrative cost of a SIMPLE IRA for your employer is considerably much less than what a 401(k) would be.
If you are a business owner, here are some consideration if your interested in opening a Simple IRA for you and your employees.
What You Give to Your Employees is Theirs-Immediately
In 401k plans, you are allowed to put a vesting schedule that requires the employee to work there for a certain number of years before they can take the money if they quit or get fired. This is not the case with the Simple IRA. The day that you make a contribution to your employee’s account, the money is immediately theirs. If they want to cash it out, then they can; although they have to pay a pretty stiff penalty.
Employers Have To Match in a SIMPLE IRA
Each year, the you are required to make a contribution to your SIMPLE IRA account whether it be in the form of a match or what’s called a non-elected contribution. Matching contribution states that the employer has to match at least what you match. So, if you’re matching 3%, the employer has to match 3% as well. Note that 3% is the most that the employer has to match, which could be considerably different than compared to a 401(k) or SEP IRA.
You do have the option to reduce the matching amount to 1% for two of a five year period. That means if you do decide to do this, that you have to match the full 3% for the remaining three of those five years. This aspect makes the Simple IRA a little tricky and not quite that “simple”.
If you don’t want to worry about the match, then you can elect to do a non-elective contribution. This means that you will have to contribute 2% of your employee’s salary no matter what.
Remember, what you match is based on the employee’s salary, not yours or the businesses. Business owners often times get this confused.
The Employees Control the Investments
With most 401(k)s, you are limited to the investment options of the 401k provider. This is considerably different when compared to the SIMPLE IRA. Being a self employed retirement plan, the SIMPLE IRA gives you the discretion of what exactly you want your money invested into. If you want to buy 100 shares of XYZ stock, then you have the capability and freedom to do so. (Note: you are allowed to do this in a SEP IRA, too)
Employees Can Defer, Too.
Employees, if they choose, can defer up to $11,500 per year into the Simple IRA. You are currently allowed to contribute up to $11,500 per year in a SIMPLE IRA. If they are over the age of 50, then they are allowed a catch-up contribution, which is $2,500. These are the same contribution limits as the business owner, as well. Please note that the $11,500 is far less than the $16,500 that you are eligible to contribute to a 401k.
No Borrowing Allowed
Simple IRA’s do not allow you to borrow as a 401k plan may. If they have to get money, they’ll have to pay tax and penalty, which is higher than most plans-see below.
The SIMPLE IRA Two-year Rule.
This is something that should be definitely noted within the SIMPLE IRA. Most retirement plans — 401(k)s, regular IRAs, or Roth IRAs, etc. — have the 10% early withdrawal penalty if under the age of 59.5. But with the SIMPLE IRA, it takes it one step further. If the SIMPLE IRA that you’ve started is less than two years and you cash that out, instead of the normal 10% penalty, you will be subject to a 25% penalty in addition to ordinary income tax. That is a huge item to not be overlooked. Keeping in mind as well too that doesn’t apply to just cashing it out. If you were attempting to roll over your SIMPLE IRA into a rollover IRA, the 25% penalty would apply as well. The key point is just to wait the two years before converting into either a regular IRA or cashing it out.
Typically, most people automatically assume they should roll over their old 401(k) into a traditional IRA. However, a lot of people have been asking about another option lately – and that’s whether you can roll your 401(k) over into a Roth IRA instead.
Fortunately, the definitive answer is “yes.” You can roll your existing 401(k) into a Roth IRA instead of a traditional IRA. Choosing to do so just adds a few additional steps to the process.
Whenever you leave your job, you have a decision to make with your 401k plan. Most people don’t want to let an old 401(k) sit idle with an old employer, and could benefit immensely by moving those funds somewhere that could benefit them more in the long run. Let’s see if I can help you make “cents” of the situation.
But first, let’s look at the rules behind the strategy of rolling over your 401k into a Roth IRA.
Table of Contents
Need to open a Roth IRA?
My favorite online broker is Ally Invest but you can check out our recap on the best places to open a Roth IRA and the best online stock broker sign-up bonuses. There are many good options out there, but I have had the best overall experience with Ally Invest. No matter which option you choose the most important thing with any investment is to get started.
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Roth IRA Rollover Rules From 401k
As a reminder, you must generally be separated from your employer to roll your 401k into a Roth IRA. However, some employers do permit an in-service rollover, where you can do the rollover while still employed. It’s permitted by the IRS, but not all employers participate.
Before January 1, 2008, you weren’t able to roll your 401(k) into a Roth IRA directly at all. If you wanted to do so you had to complete a two-step process. (Keep in mind that this would also apply to old Simple IRA’s, SEP IRA’s and 403b’s, 457, and qualified pensions, too)
Open a Traditional IRA.
Convert the Traditional IRA to a Roth IRA.
However, the law changed shortly after and this option became available. Still, just because the law has made this option available doesn’t mean you can definitely roll your old 401(k) into a Roth IRA no matter what. Unfortunately, it all depends on your plan administrator.
For example, recently I had two clients who intended to roll their old retirement plans into a Roth IRA.
One client had an old military retirement plan- Thrift Savings Plan (TSP) – and the other had an old state retirement plan. After helping each of them complete the required paperwork, I came across an interesting discovery.
The TSP rollover paperwork had a box you could mark if you wanted to roll over the plan into a Roth IRA (the instructions had been added to make sure you had a Roth IRA already established). However, the state retirement plan did not give that option.
The only option was to open a traditional IRA to accept the rollover and then immediately convert it to a Roth IRA. That certainly seemed like a hassle at the time, and it definitely was.
However, this man’s state retirement plan is not the only one I’ve encountered with these extra “rules.” Many 401(k)’s and 403(b)’s come with the same “No-Roth IRA Rollover” option. This option was supposed to be mandatory in 2010, but some still do it on a voluntary basis.
At the end of the day, this means you should explore this option thoroughly before automatically assuming it would work in your case. Ask questions, consult your financial advisor, and read through all of your rollover paperwork carefully before you begin moving in this direction.
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Recap on Roth IRA Conversion Rule
These days, nearly anyone can take all of their traditional IRAs and old retirement plans and convert them to a Roth IRA. The amount you convert will be taxed, but it still can be an attractive move for those that feel that taxes are going nowhere but up.
How Do I Rollover if I Receive the Check?
If you receive a distribution check from your 401(k) rollover to a Roth IRA, then chances are good they will hold around 20% for taxes. If you want a direct 401(k) rollover to a Roth IRA, you may want to send that check back to your employer 401(k) provider and ask to be sent all of your eligible retirement distribution directly to your new Rollover IRA account (not as a check, or they will just give you 80% again).
You have 60 days upon receiving the check to get the money into the Roth IRA- no exceptions! So don’t procrastinate on this one.
What About the Roth 401k?
If your employer offers a Roth 401k and you were savvy enough to take part, the path to a rollover will be much easier. When you’re converting one Roth product to another, there is simply no need for conversion. You would simply roll the Roth 401(k) directly into the Roth IRA with the help of your plan provider.
Roll Your 401(k) by Following These Steps
You have to have a Roth IRA open/established before you can do any of this.
Ask your plan provider about the paperwork required to roll your plan over, then complete the paperwork in a timely manner.
Enjoy the tax-free growth of your Roth IRA!
4 Signs It Makes Sense to Roll Your 401(k) into a Roth IRA
If you’re thinking of rolling your 401(k) into a Roth IRA instead of a traditional IRA, you have plenty of reasons to do so. Not only do Roth IRAs let you invest your dollars in the same investments as traditional IRAs, but they offer additional perks that can help you save money down the line. Here are four signs that a Roth IRA might actually be your best bet.
1. You expect to pay higher taxes in the future.
Since Roth IRAs use after-tax dollars, you’ll have to pay taxes upfront on any funds you roll over. However, you won’t have to pay taxes on your distributions, which could be extremely beneficial if you’re taxed at a higher rate when you reach retirement. You’ll pay taxes either way – now or later. But with a Roth IRA, you can rest assured your withdrawals will be tax-free.
2. You want to take withdrawals when you’re ready, and not a minute before.
While traditional IRAs force you to begin taking withdrawals at age 70 ½, Roth IRAs do not have this stipulation. Because of this, you can squirrel your Roth IRA funds away until you’re ready to use them.
3. You expect to earn more money in the future.
If you plan to earn lots of money in the future – or earn a high income now – you should consider rolling your funds into a Roth IRA instead of a traditional IRA. For single filers in 2023, the maximum income allowable for contributions to a Roth IRA starts at $138,000 and ends at $153,000. Learn more about Roth IRA rules and contribution limits here.
For married filers, on the other hand, the ability to contribute to a Roth IRA begins phasing out at $218,000 and halts completely at $228,000 for 2023. The more you earn in the future, the harder it will become to contribute to a Roth IRA and secure the benefits that come with it.
4. You want to increase your tax diversification.
Contributions to traditional IRAs are tax-advantaged, meaning you won’t pay taxes on your invested funds until you begin taking withdrawals at retirement. Roth IRAs, on the other hand, are taxed up front but offer tax-free withdrawals after age 59 ½.
If you’re unsure how your tax and income situation might pan out in the future, having both types of accounts – a traditional IRA and a Roth IRA – is a smart move in terms of diversifying your future tax exposure.
401k to Roth IRA Rollover Rules
Details
Eligibility
You can roll over a 401k to a Roth IRA if you have left the employer sponsoring the 401k and are no longer contributing to the plan. Some plans also allow in-service rollovers, but it’s best to check with your plan administrator for details.
Taxes
When you roll over a 401k to a Roth IRA, you will owe income taxes on the amount you convert. This is because contributions to a 401k are made with pre-tax dollars, while contributions to a Roth IRA are made with after-tax dollars.
Conversion Limitations
There is no limit on the amount you can convert from a 401k to a Roth IRA. However, the amount you convert will be added to your taxable income for the year in which you make the conversion, which could have tax implications.
Timing
You can convert a 401k to a Roth IRA at any time, but it’s important to consider the timing of the conversion carefully. If you convert when your income is higher, you will owe more in taxes.
Penalty-Free
If you are 59 ½ or older, you can convert a 401k to a Roth IRA penalty-free. If you are younger than 59 ½, you may be subject to a 10% early withdrawal penalty on the amount you convert.
The Bottom Line – Rolling Over 401k into a Roth IRA
Rolling your 401(k) into a Roth IRA is a smart decision for many investors, but it may not be right for everyone.
Some financial advisors may suggest rolling over your 401k into a Roth IRA to take advantage of the tax-free growth the account offers. While this can be a great option for some, it’s important to consider if you’ll be able to afford to pay the taxes on your contributions and earnings when you eventually withdraw them.
Before you pull the trigger, make sure to investigate all of your options and consider speaking with a tax professional. When it comes to complex investment vehicles and taxes, what you don’t know can hurt you
FAQs on Rollover 401k to Roth IRA
Can you roll over 401k to Roth IRA without penalty?
Yes, you can roll over funds from a 401(k) to a Roth IRA without incurring any penalties, but there are some important rules and restrictions to be aware of.
First, you’ll need to meet the eligibility requirements for a Roth IRA, which include having earned income and not exceeding certain income limits. If you’re eligible, you can roll over funds from your 401(k) to a Roth IRA by asking your 401(k) plan administrator to transfer the funds directly to your Roth IRA account. This is known as a “direct rollover” and it allows you to avoid paying any taxes or penalties on the funds.
However, there are limits on how much you can contribute to a Roth IRA each year, and there may be tax consequences if you exceed those limits. It’s important to consult with a financial advisor or tax professional before making any decisions about rolling over funds from a 401(k) to a Roth IRA. They can help you understand the rules and restrictions and determine if a rollover is the right move for your financial situation.
What are the disadvantages of rolling over a 401k to a Roth IRA?
There are a few potential disadvantages to rolling over funds from a 401(k) to a Roth IRA. These include:
1. Tax implications: When you roll over funds from a 401(k) to a Roth IRA, you’ll have to pay taxes on the amount you roll over. This can be a disadvantage if you’re in a high tax bracket and don’t have other funds available to pay the taxes.
2. Loss of employer matching: If your employer offers matching contributions to your 401(k), you’ll lose out on those contributions if you roll over your funds to a Roth IRA.
3. Loss of certain benefits: 401(k) plans may offer certain benefits, such as loan provisions and hardship withdrawals, that are not available with a Roth IRA. If you roll over your funds to a Roth IRA, you’ll lose access to these benefits.
Overall, rolling over funds from a 401(k) to a Roth IRA can be a good move for some people, but it’s important to carefully consider the potential disadvantages and consult with a financial advisor before making any decisions.
What is the tax penalty for rolling 401k to Roth IRA?
If you roll over funds from a 401(k) to a Roth IRA, you’ll have to pay taxes on the amount you roll over. This is because funds in a 401(k) are pre-tax, meaning you don’t have to pay taxes on them until you withdraw the funds. When you roll over the funds to a Roth IRA, you’re essentially withdrawing the funds and then depositing them into the Roth IRA, so you’ll have to claim that amount of reportable income.
Since you’re “rolling over” and not taking a distribution you won’t have to pay the 10% early withdrawal penalty if you’re under the age 59 1/2. If you do choose to this be prepared to pay the taxes on the rollover out of pocket. Otherwise if you use your 401k money to pay the taxes you will be penalized on that amount.
What is the Roth five year rule?
The Roth 5 year rule is a requirement for certain tax-free withdrawals from a Roth IRA. In order for a withdrawal from a Roth IRA to be tax-free, the account must have been open for at least 5 years and the withdrawal must be made after the age of 59 1/2. If these conditions are not met, the withdrawal may be subject to taxes and penalties.
The Roth 5 year rule applies to both contributions and earnings in a Roth IRA. For example, if you make a contribution to a Roth IRA and then withdraw it within 5 years, the withdrawal will be subject to taxes and penalties unless it meets one of the exceptions to the rule. The same is true for earnings on your contributions – if you withdraw earnings from a Roth IRA within 5 years, they will be subject to taxes and penalties unless an exception applies.
There are a few exceptions to the Roth 5 year rule, including:
-Withdrawals made to pay for qualified higher education expenses -Withdrawals made to pay for qualified first-time homebuyer expenses -Withdrawals made due to the account holder’s disability -Withdrawals made by a beneficiary of the account after the account holder’s death
It’s important to understand the Roth 5 year rule and the exceptions to it before making any withdrawals from a Roth IRA. If you’re not sure whether a withdrawal will be subject to taxes and penalties, it’s a good idea to consult with a tax professional.
Over the past couple of years I’ve looked at, and reviewed, quite a few online brokers. There are a lot of pretty good ones out there, but even among all the good ones I’ve reviewed, TD Ameritrade stands out from the pack. They’ve been honored by multiple financial publications like Smart Money, Kiplinger and Barron’s for their great web and mobile tools, usability, commitment to customer education and just being a great place for investors of all types – especially long term investors.
Today I thought I’d do a TD Ameritrade review, exploring their history, the industry awards they’ve received, as well as looking at the important stuff like fees, tools and mobile trading options. So let’s get started.
TD Ameritrade Background
TD Ameritrade has been around for quite a while, tracing it’s roots back to a company launched in the 1960s called Rahel, Knack and Co. From Wikipedia:
The company started as an investment banking business named Rahel, Knack and Co. in the 1960s in Omaha, Nebraska. It was purchased in 1975 by J. Joseph Ricketts, Robert Perelman, and David G. Kellogg, renamed First Omaha Securities, and became one of the first firms to offer negotiated commissions.
Ricketts acquired the company completely from the other two founders in 1981. The company became AmeriTrade Clearing in 1983. In March 1997, Ameritrade became a publicly held company. In 2005 Ameritrade acquired TD Waterhouse and was renamed TD Ameritrade.
Today TD Ameritrade has over 6 million U.S. customers, and more if you include international customers. As of 2008 they were 746th-largest US firm.
TD Ameritrade is member of SIPC, which means your investments are protected by SIPC insurance up to $500,000 and $100,000 of it can be in cash. This means that you are protected against the company going into insolvency. You are not protected against market losses.
Awards
TD Ameritrade has received a lot of praise as one of the top online brokers in the industry. Among the awards they’ve received in the past couple of years:
Kiplinger named them #1 Best online broker for 2011 and called them “a great value proposition for long-term investors“.
Barron’s ranked TD Ameritrade #1 Best site for novices in their 2012 annual review of online stock and option brokers.
Barron’s ranked TD Ameritrade #2 Best site for long term investing in their 2012 annual review of online stock and option brokers.
Barron’s ranked TD Ameritrade #3 Best site for options traders in their 2012 annual review of online stock and option brokers.
Smart Money recognized them as the #1 discount brokerage firm, tied with one other company in SmartMoney’s 2011 review of online brokers
Stockbrokers.com ranked TD Ameritrade #1 overall broker in their 2012 broker review.
As you can see the last couple of years TD Ameritrade has consistently been rated as one of the top platforms for investing, especially for long term investors like I am.
TD Ameritrade Fees, Commissions And Minimums
When you’re opening an online brokerage account one of the first things you should probably look at is what your fees, commissions and minimums on your account will be. With TD Ameritrade you’ll get no account minimums, no maintenance fees and really no other unexpected fees.
Stock Trades
TD Ameritrade has $9.99 stock trades, which are definitely are in line with industry average. For what you’re getting with them for tools and research it is definitely a decent price.
Options Trades
For option trades, they also charge $9.99 per trade, plus 75 cents per contract.
Fees And Minimums For An Account
TD Ameritrade doesn’t have account maintenance fees, monthly minimums, inactivity fees. Broker assisted stock trades are $49.99. To see a full schedule of their fees, head on over to their site.
There is also no minimum account funding level to open a cash account and a $2,000 minimum to open an options or margin account.
TD Ameritrade Tools
TD Ameritrade has some great tools you can access via their platform. For example, the Trade Architect tool-set includes things like custom charts, probability and earnings analysis, stocks watch lists, integrated community to give you help and more.
TD Ameritrade’s Thinkorswim Trading Platform has also been voted the number one trading platform by Barron’s. So you know their trading tools are top notch. Their award winning mobile trading apps are available for Blackberry, iPhone, Ipad, Android, or Windows phone. Trading on the go should never be a problem.
TD also has a ton of research available if you want to investigate stocks before you buy. They offer investing and trading reports from Jaywalk Consensus, Research Team, Market Edge, S&P Columns, and S&P Research. Premium reports are also available for an additional charge if you want to get even more in depth. For the average person, however, they have a ton of knowledge available at their fingertips.
TD Ameritrade Account Types
TD Ameritrade has a ton of investment account options for individuals, families and more. If you want to open a retirement or investing account, they’ve probably got you covered:
Standard Accounts: Individual, Joint Tenants, Tenant in Common, Community Property, Tenants by the Entireties, Guardianship or Conservatorship.
Retirement Accounts: Traditional and Roth IRAs, Rollover IRA, SEP IRA, SIMPLE IRA
Education Savings Accounts: 529, Coverdell ESA, UGMA/UTMA.
Specialty Investing Accounts: Trust, Limited Partnership, Partnership, Investment Club, LLC, Sole Proprietorship, Corporate, Non-Incorporated Organization, Pension or Profit Plan for Small Business.
Open Your Own TD Ameritrade Account Today
Conclusion
When considering an online discount brokerage TD Ameritrade is definitely one of the most awarded and most recommended options out there. They’ve got low fees, reasonable commissions and their online trading tools and research are second to none. Their Ipad app is also one of the best available.
Add to that the fact that they’ve been awarded extensively in the last year, with at least 4 publications giving them a #1 rating as best online brokerage or best for long term investors, and you’ve got one of my top brokerage options to consider. Definitely put them on your short list.
Have you used TD Ameritrade? What has your experience been like? Are you happy with them? Tell us your thoughts in the comments.
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By John Frainee3 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited April 24, 2012.
It’s time to invest, but you’re not sure what type of retirement account is right for you. Perhaps you’ve heard your employer talk about a 401(k), but have also heard about something called an IRA. The 401(k) vs. IRA – what’s the difference?
Let’s define each term to help you figure out what’s the best investment for you.
The IRA (Individual Retirement Arrangement)
An Individual Retirement Arrangement is a form of retirement plan that gives investors (like you) certain tax advantages for retirement savings. Note that IRAs are also called “Individual Retirement Accounts,” but the term “Arrangement” is more appropriate.
An IRA can contain a number of different stocks, bonds, or mutual funds; the mix is up to you. This is the same as a 401(k) which we’ll get to later.
Here are two of the most popular types of IRAs:
1. The Traditional IRA
When people refer to their IRA, they’re typically talking about a traditional IRA. The great thing about a Traditional IRA is that contributions are tax-deductible, meaning you won’t pay any taxes on your contributions. This is a great option if you desperately need the money you would normally pay in taxes for other types of contributions. However, you do have to pay taxes on withdrawals at retirement.
2. The Roth IRA
Contributions made into a Roth IRA are already taxed, but you won’t have to pay taxes on withdrawals at retirement. This offers a mathematical advantage over the Traditional IRA, as your money grows tax-free! This type of IRA is highly recommended.
Other IRAs
There are a number of other IRAs available but are seldom discussed. Here are a few of them:
SEP IRA – For small businesses to contribute funds into their employee’s Traditional IRA.
SIMPLE IRA – This type of IRA requires the employer to match contributions to the plan whenever an employee makes a contribution. This is actually remarkably similar to the 401(k), but it does have lower contribution limits.
Self-Directed IRA – Allows account holders to make investments toward the retirement plan.
For more information on funding an IRA and more, see Publication 590 produced by the IRS.
The 401(k)
Like the IRA, a 401(k) is also a type of retirement savings account. Within the 401(k) can be a number of different investments, such as stocks, bonds, or mutual funds.
There are different types of 401(k)s just like the IRA:
1. The Traditional 401(k)
One major difference between the 401(k) and most other IRAs is the fact that employers are to match a certain amount of the contribution their employees make into the account. Businesses offer 401(k)s at their discretion for the benefit of their employees.
Traditional 401(k)s allow you to make tax-deductible contributions, but you’ll have to pay taxes on withdrawals at retirement.
2. The Roth 401(k)
This type of 401(k) is very exciting. Here are a few facts about the Roth 401(k):
You pay taxes on your contributions, but your investments grow tax-free and you can withdraw funds at retirement without paying any more taxes! This has a huge mathematical advantage, just like the Roth IRA.
You still get a contributing match from your employer (like the traditional 401(k)).
Some businesses (such as corporations) are now offering the Roth 401(k), and if your employer offers it, by all means take it!
Another nice aspect of the 401(k) is that at this time it allows a higher rate of contribution. See 401(k) contribution rates for more information.
You may also want to read general information on 401(k)s from the IRS.
A Recommended Investing Strategy
Overwhelmed yet? There is a lot to learn when it comes to the 401(k) vs. the IRA. To make things a bit simpler, here is a recommended strategy for investing and making the most of your 401(k) and IRA.
The below investments are prioritized by their ability to build wealth:
The Roth 401(k).
The “Traditional” 401(k).
The Roth IRA.
The Traditional IRA.
Why would you choose this investment strategy? The 401(k) gives you the advantage of the employer match, while the “Roth” gives you the advantage of not paying taxes on your withdrawals.
Hopefully this information has helped you understand the differences between an IRA versus 401(k). Now go invest!
If you have any questions or advice for our readers on how you might invest in an IRA vs. a 401(k), leave a comment below!
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