Understanding Fidelity Rollover IRA vs Roth IRA

A Fidelity Rollover IRA and a Roth IRA are two different types of retirement accounts that can help you save for your future.

A Fidelity Rollover IRA is a type of traditional IRA where you contribute after-tax dollars, but your contributions are tax-deductible.

As mentioned in the article, a Fidelity Rollover IRA allows you to deduct your contributions from your taxable income, reducing your tax liability for the year.

You can contribute up to $6,000 in 2022, or $7,000 if you are 50 or older, to a Fidelity Rollover IRA.

Roth IRAs, on the other hand, are funded with after-tax dollars, meaning you've already paid income tax on the money you contribute.

The main difference between a Fidelity Rollover IRA and a Roth IRA is when you pay taxes on your contributions and withdrawals.

A rollover IRA is a retirement account used to move money from a former employer-sponsored retirement account, such as a 401(k) plan, into an IRA without losing its tax-deferred status. This is a great way to consolidate your retirement savings and potentially increase your investment options.

You can roll your money into a traditional or Roth IRA, both of which offer tax-deferred investments, allowing you to typically roll the funds over tax-free. However, if you roll pre-tax funds into a Roth IRA, you will owe taxes.

A rollover IRA can provide a wider range of investment options and low fees, particularly compared with 401(k)s, which can have a short list of investment options and higher administrative fees. This is a significant advantage for long-term growth.

Money in accounts that are covered by the Employee Retirement Income Security Act (ERISA) typically cannot be seized by creditors if you are sued, but this protection is lost when you roll your 401(k) into an IRA.

A Rollover IRA is a type of Individual Retirement Account (IRA) that allows you to transfer money from a previous employer-sponsored plan, such as a 401(k), into an IRA.

You can roll your money into a traditional or Roth IRA, and since both a Traditional IRA and 401(k) are tax-deferred investments, you can typically roll the funds over tax-free.

A rollover IRA may help address concerns with your old 401(k), including limited investment options, potentially higher costs, and after-tax 401(k) money being better off in a Roth IRA.

To roll over to a Roth IRA, you can roll pre-tax money to a traditional IRA and after-tax money to a Roth IRA without paying taxes, as long as certain rules are met. However, you will owe taxes on a full or partial rollover to a Roth IRA.

It's worth noting that a rollover IRA may lose some protection from creditors, which is typically available for accounts covered by the Employee Retirement Income Security Act (ERISA).

A rollover IRA can be a great way to take control of your retirement savings. You can transfer money from a previous employer-sponsored plan, like a 401(k), into an IRA without losing its tax-deferred status.

One of the main benefits of a rollover IRA is the flexibility it offers in terms of investment options. You'll likely have access to a broader array of investments, such as mutual funds, ETFs, and real estate investment trusts, which can help you create a customized investment plan that suits your goals.

This flexibility can also help you save money on investment fees. Administrative fees associated with operating a 401(k) can sometimes get passed to plan participants, so rolling over to an IRA may result in lower fees.

In addition to the investment benefits, a rollover IRA can also simplify the withdrawal and required minimum distribution processes when you're ready to retire. You'll have one account to manage, rather than multiple 401(k) accounts from previous employers.

Here are some specific benefits of a rollover IRA:

You can roll over after-tax money to a Roth IRA without paying taxes, as long as certain rules are met. Your plan's terms will determine when and how money is distributable, so review your plan document or summary plan description for more information.

You can roll pre-tax money to a traditional IRA and after-tax money to a Roth IRA and avoid creating taxable income. This is according to IRS guidance, but always consult a tax advisor to decide if it's the right move for you.

The IRS allows for a few different scenarios, but not all may be allowed by your plan. In the most straightforward scenario, you would roll over the entire account balance out of the workplace plan and direct the after-tax contributions to a Roth IRA and pre-tax contributions and earnings to a traditional IRA.

If your plan allows partial withdrawals and source-specific withdrawals, you can take a rollover of just the after-tax source balance, which includes both the after-tax contributions and all of the associated earnings. The after-tax balance could go to a Roth IRA while earnings would go to a traditional IRA.

You can also choose to roll out only a portion of the after-tax balance, but to roll over a partial amount of after-tax contributions, a proportional amount of associated earnings must also be rolled over. This is an important note to keep in mind.

Contributions made before 1987 are treated differently than those made after 1987. Pre-1987 employee contributions may be distributed without taking a taxable disbursement of the associated earnings.