Individual Retirement Accounts (IRAs)

Aug 21, 2020

When it comes to your retirement, it’s never a bad idea to maximize your savings as early as possible. By investing early and consistently, you’ll be at a huge advantage for securing a comfortable retirement.

An IRA is part of any solid retirement savings strategy. Though you may be contributing to a retirement plan at work, having an IRA allows you another tax-efficient method of saving for retirement. And if you have multiple retirement accounts, you can consolidate all your retirement assets into an IRA.


10 Common Rollover Mistakes and How to Avoid Them!

What is an IRA?

An Individual Retirement Account, or IRA, is a tax-advantaged retirement savings account. Unlike employer-sponsored accounts like 401(k)s, IRAs are opened by individual investors.

Upon opening an IRA, you can invest your funds into stocks, exchange-traded funds, and mutual funds. You can also use your IRA to supplement any of your employer-sponsored retirement plans, which unlocks a potentially wider range of investment options.

There are various types of IRAs including Traditional, Roth, SEP, SIMPLE, and Rollover. Each has different requirements, conditions, and unique benefits.

Depending on the type of IRA, you benefit from one of two huge tax perks:

  • Tax-deferred growth so you can postpone taxes until you withdraw your money from your account, and
  • Tax-free growth so you won’t owe taxes on your investment earnings at all

In exchange for these tax benefits, there are certain restrictions, such as contribution limits and an early withdrawal penalty.

An IRA can include savings from several different sources. In addition to contributing directly, you can also roll over contributions from 401(k)s and other employer-sponsored retirement plans.

Whether you choose a Traditional, Roth, SEP, or SIMPLE IRA, the tax benefits allow your savings to compound at a much faster rate than in a taxable account. If you need to save for living expenses, travel plans, and passion projects in retirement, having an IRA is a no-brainer.

Here are some fast facts about 4 types of IRAs.

I’ve heard of a Rollover IRA. What’s that?

The Rollover IRA is an account that allows you to move funds from your old employer-sponsored retirement plan into an IRA. Generally, folks will open a Rollover IRA after leaving a job with an employer-sponsored plan, such as a 401(k) or 403(b).

A Rollover IRA generally has greater flexibility and lower fees than a 401(k). You aren’t subjected to taxes or withdrawal penalties at the time of transfer, and funds can continue to grow with tax-favorable treatment. It’s best for those who want to consolidate former employer plans and gain access to more investment options.

Take charge of your retirement outcomes

Rolling over your old 401(k) to an IRA is easy with Prosperity.

Get in touch today to learn about whether a Rollover IRA is right for you!

How Does an IRA Work?

Investments held in IRAs can encompass a range of financial products, including stocks, bonds, ETFs, and mutual funds.

Because IRAs are intended to help you save for retirement, you’ll pay an early-withdrawal penalty of 10 percent if you withdraw from your accounts before age 59½. Depending on the type of IRA you have, you may also be required to pay income tax on your early withdrawal.

As an individual taxpayer, you can establish a Traditional or Roth IRA.

Employers can open SEP IRAs and SIMPLE IRAs.

Individual Taxpayers: Traditional vs. Roth IRA

*You may contribute earned income which includes wages, salaries, tips, bonuses, commissions, and self-employment income. It doesn’t include alimony, child support, rental property income, interest and dividends from investments, pay you received from an inmate in a penal institution, retirement income, Social Security, or unemployment benefits.

Small Business Owners and Self-Employed Individuals: SEP vs. SIMPLE IRA

DOWNLOAD OUR FREE GUIDE– 10 Common Rollover Mistakes and How to Avoid Them!

Why Do I Need an IRA?

If you plan on retiring, you’re going to need income to support your post-work lifestyle. Financial experts estimate that most Americans will need around 85 percent of their pre-retirement income in retirement—and even more if you have big plans for travel, leisure, or legacy. Having money in an IRA is a way to make that happen.

Benefits of an IRA

Elliot Kallen, Fiduciary Financial Advisor in San Francisco Bay Area

Interested in opening an IRA? We can help.

An IRA empowers you to boost your retirement savings alongside, or in lieu of, a 401(k) or 403(b).

Ready to explore your retirement options? I’ll personally walk you through the process.

Elliot Kallen

Registered Principal, Prosperity Financial Group

What is the Best Place to Open an IRA?

An IRA must be opened with an IRS-approved institution, such as a bank, brokerage company, federally insured credit union, or Registered Investment Advisory firm.

Most individual investors open IRAs with brokers. However, when it comes to financial matters, it’s safest to go with a Registered Investment Advisor. Why? You might be surprised to learn that not all banks, brokers, or financial advisors are required to act in the best interest of their client. 

If you’re looking for sound, unbiased investment advice, consider a financial institution that has the Fiduciary duty to put your interests first: a Registered Investment Advisor.

As a Registered Investment Advisory firm, we are regulated by the Securities and Exchange Commission, or the SEC. That means we have a fundamental obligation to act in your best interest.

You’ll receive full transparency when we help you create your unique financial and investment plan. Our investment recommendations are based on what’s best for you.

Types of IRAs

Traditional and Roth IRAs are two of the most widely used individual retirement savings vehicles. The lesser-known SEP and SIMPLE IRAs offer tax-saving, money-growing benefits for employers. You can also take advantage of a Rollover IRA to consolidate all your retirement assets and access better investment options.

How to set up your Backdoor Roth IRA

A backdoor Roth IRA allows you to contribute to a Roth IRA even if your income exceeds the IRS’ income limits.

Types of Transfers

The conversion must take place one of three ways:

  1. A rollover. You receive the money from your Traditional IRA, then deposit it into your Roth IRA within 60 days.
  2. A trustee-to-trustee transfer. The IRA provider sends the money directly to your Roth IRA provider.
  3. A “same trustee transfer.” Your money goes from the IRA to the Roth at the same financial institution.

The pro rata rule

The IRS permits Traditional IRAs to roll over into Roth IRAs on a pro rata, or proportionate allocation, basis.

When determining your tax bill on a conversion from Traditional to Roth, the IRS will assess all your Traditional IRAs together.

Let’s say that all of your Traditional IRAs consist of 85% pre-tax funds and 15% after-tax funds; that will become the proportion of your money that is taxable upon conversion. The IRS applies the pro rata rule to your total IRA balance not at the time of conversion, but rather at year-end.

Why open a Rollover IRA?

When you leave a job, you have 3 options for handling your old 401(k) or 403(b).


Leave your plan as is.

This isn’t ideal.

You won’t be able to easily contact HR for questions or concerns, and you may be charged higher 401(k) fees as an ex-employee.


Cash out your IRA.

This is an even worse option. Why?

You’ll have to cough up a 10 percent early withdrawal fee on top of ordinary income taxes on the amount distributed.

That translates to 40 percent wiped out of your company-sponsored nest egg.


Do an IRA Rollover.

That leaves the last choice: you can roll over either into your current employer’s retirement plan or into an IRA.

Rolling into an IRA is generally the better option because unlike a 401(k), which can have fewer investment options and higher administrative fees, an IRA gives you a wide variety of investment options and comparatively lower fees.

How can I roll over my IRA?

An IRA Rollover can take place in one of three possible ways.

1. Direct rollover 

A Direct Rollover is the tax-free movement of retirement funds from one type of retirement account directly into a different type of retirement account. For example, you can roll over your 401(k) or 403(b) into an IRA. Your plan administrator will draft a check or wire transfer made out to your new account custodian.

2. Trustee-to-trustee transfer

A trustee-to-trustee transfer happens between like accounts. For example, a Traditional IRA can transfer to another Traditional IRA. If you’re getting a distribution from an IRA, you can ask the financial institution holding your IRA to make the payment directly from one IRA to another IRA. Since the money is never in your hands, the IRS has no right to charge any penalties or taxes. 

3. 60-day rollover

If you’re receiving a distribution from an IRA or other retirement plan, you can deposit all or some of it into an IRA or another retirement plan. The rollover must be completed within 60 days of the date that your distributions are granted—otherwise, all or part of your distribution may be taxed and subject to a stiff 10 percent early distribution penalty.

Does your plan qualify for an IRA Rollover?
  • Traditional IRA
  • Employer’s qualified retirement plan for employees
  • Section 457(b) eligible governmental plan
  • Section 403(b) plan
  • Roth IRA (very limited)
  • Designated Roth account within a plan (also limited)
  • Download our free guide

    10 Common Rollover Mistakes and How to Avoid Them!

    Pros and cons of an IRA rollover


    • Simplified financial situation. You might find it difficult to keep track of all the company 401(k)s, 401(b)s, and other accounts that you’ve left behind throughout the years. You can simplify your retirement planning by rolling over and consolidating your retirement accounts.
    • Lower administrative fees. Your old retirement plan might have had all kinds of fees attached to it, including costs for each fund you held, administrative fees, and any number of possible other fees. By doing an IRA Rollover, you’ll save money on all those little expenses that can eat into your investment returns over the long term.
    • More control over your investments. As soon as you complete the Rollover process, your past retirement plan assets from your previous employers will be transferred to an IRA that’s yours and yours alone. Because you own your IRA, you’ll have complete control instead of having to work around the rules and policies of your former company retirement plans.
    • More investment options. Chances are, your previous employers’ 401(k)s had a limited number of investment choices. Maybe they had a certain percentage of your investments in their company stock. By doing an IRA Rollover, you’ll have access to more investment choices and the ability to buy and sell your holdings anytime you want.
    • Easier to understand. Each company has different rules and set-ups for their 401(k), and once you become an ex-employee, it can be difficult to get in touch with an advisor or administrator. In contrast, IRA rules are standardized under the IRS regulations, which means that no matter your broker, all IRAs operate by the same set of rules.
    • Investment guidance. Many investors prefer to speak to a trusted Financial Advisor to receive Fiduciary advice about building a sound investment portfolio. Our Advisors can help you select the best financial investment choices to maximize market gains and minimize losses, while seeking a rate of return that’s consistent with your investment objectives and risk tolerance.


    • Improper execution could lead to tax penalties. If the IRA Rollover isn’t done according to proper rules and guidelines, your nest egg will be subject to substantial tax consequences. It’s important to consult a Financial Advisor before making such a big financial move.
    • Shorter loan repayment term. It’s easier to access your retirement money from a 401(k) than an IRA. Some employers allow you to borrow from your 401(k) account and repay the loan, plus some interest, over a five-year term. IRS rules don’t allow you to borrow from an IRA in the same way—but technically speaking, under the 60-day rollover rule, you can borrow from your IRA as long as the full amount is repaid within 60 days.

    Which IRA is Best For Me?

    The IRA that you choose will depend on a few different things:

    • Your employment status
    • Your income
    • Your workplace benefits
    • How much you want to contribute
    • Whether you plan to withdraw before your designated retirement age

    The two most popular types of IRAs are Traditional and Roth. The main difference between them is their tax treatment:

    • Traditional IRA. You can deduct your contributions as they’re going into your account, but you’ll have to pay taxes on distributions in retirement. If you do a 401(k) Rollover, you won’t pay any taxes on the rolled-over amount until retirement.
    • Roth IRA. You make contributions with after-tax money, so your withdrawals and gains are tax-free after age 59½. You’ll have to pay taxes on the rolled amount, unless you’re rolling over to a Roth 401(k).

    Stick with a Traditional IRA if you need to use cash from the Rollover to foot the tax bill today. A Roth IRA will only open you up to more tax complications.

    We Can Help

    If you have big plans for retirement, you’ll likely need more than just your employer-sponsored savings plan to fund your retirement vision.

    Taking action today is the first step toward securing that awesome retirement that you’ve always dreamt of. We’ll support you in your retirement planning process by guiding you toward better, more well-informed choices and adapting your retirement plan as needed. 

    Our Fiduciary Advisors can help you explore the many investment opportunities that an IRA has to offer, as well as tax-minimizing strategies so you’ll have more control over your financial future.

    If you would like to learn more about opening an IRA with Prosperity Financial Group, please fill out the form below and we’ll get back to you shortly. We look forward to hearing from you.


    We’ll spend 30 minutes getting to know you—your situation, needs, and vision—then offer a strategic plan to reach your goals.
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