If you’re considering a Roth or traditional IRA for your retirement strategy, the TIAA IRA Selector Tool
can help you find out which type of IRA may be best for your financial situation.
TIAA’s IRAs also offer another benefit: You can use them to save in an annuity
, which could take care of the RMD requirements. (More below.)
Should I roll my workplace savings into an IRA?
If you’ve saved some money in your workplace retirement plan, you may be wondering what to do with it if you move from one job to another. Moving that money into an IRA can be an easy way to manage your retirement savings from your past—and future—jobs in one place. When you leave a job, you generally have four things you can do with your retirement savings: leave the money in your old employer’s plan, roll it into your new employer’s plan (if that’s allowed), roll it into a new IRA, or cash out of the plan.
While getting immediate access to your money is tempting, you’ll face tax penalties for cashing out early. Those penalties could eat up as much as 40% of your savings. For example, if you cashed out $5,000 of your savings from a 403(b) plan, you could be left with as little as $3,000.
There may be some advantages to leaving money in your old employer’s plan. For example, you could pay less in mutual fund fees through an employer’s plan than if you invested those funds with an IRA. However, by leaving the money in the prior employer’s plan, you risk having your retirement money scattered with more than one old employer over time as you switch jobs. There are a number of benefits when you consolidate retirement accounts from previous jobs into an IRA:
- Creating a “home” for all your rollover assets from future jobs.
- Making it easier to manage your investments and keep track of diversification.
- Less paperwork.
- Cutting the number of fees.
- Making it easier to track RMDs.
Should you roll over retirement money to a Roth IRA?
You can roll over money from most retirement plans, including traditional IRAs, 401(k)s and 403(b)s to a Roth IRA—regardless of your income. But should you?
With a Roth conversion, you pay taxes when you convert based on your current income-tax rate. You would generally owe no additional income tax on the converted funds—or any earnings on those funds—during retirement, provided you own your Roth IRA for at least five years.
So, rolling over money to a Roth IRA might be a good choice if you want to:
- Receive income-tax-free earnings in retirement.
- Keep funds in your retirement account as long as possible.
- Leave income-tax-free assets to your heirs.
If you don’t expect to be in a higher tax bracket in the future, you may be better off not converting retirement accounts to a Roth IRA. Keep in mind, however, that even though you will not be working full time in retirement, your taxable income could still increase due to Social Security
payments, part-time work, required distributions
from non-Roth IRA accounts, and the loss of some deductions or tax credits you may have had while working, saving for retirement and raising a family.
Here are other important things to know about rolling over to a Roth IRA:
- Because money in your traditional IRA is after-tax money (you didn’t take a deduction on your contributions), you may not owe tax on that portion when you convert to a Roth IRA.
- If you’re retired, you can convert all or part of other retirement accounts, including 403(b) or 401(k) plans, to a Roth IRA. You’ll owe tax on any pretax assets you roll over.
- If you’re working, you would need to check your current employer’s plan rules to see if you can roll over money to a Roth IRA. But you should be able to roll over money from previous employer plans.
- Also if you’re working, your employer may offer a Roth version of your retirement plan—a Roth 401(k) or Roth 403(b). If so, you can generally convert your regular 401(k) or 403(b) to the Roth plans. Then, when you leave your employer, you can roll over your Roth 401(k) or 403(b) directly to a Roth IRA. Check with your employer regarding treatment of matching contributions and other details, as they can vary.
And timing could be everything when it comes to taxes: If you convert a large sum to a Roth IRA, it may raise your tax bracket for that year since the amount you convert is considered taxable income. This may be avoided by converting no more than what would keep you in your current federal income tax bracket without bumping you into the next one. If you think your income may drop substantially in a certain year but will increase in future years, you could plan to convert to a Roth since you may be in a lower tax bracket that year.
One alternative to consider…
are not your only choice for making IRA withdrawals in retirement. There are other ways to take income from your IRAs and qualified plans that meet the IRS requirements, including through annuities.
Before you start taking RMDs, consider a few potential drawbacks:
- If you’re looking for steady, reliable lifetime income, RMDs may not be suitable. The amount of income you get can change each year based on your age and the performance of the underlying investments.
- You have to take an RMD every year, even in down markets.
- The penalty for not taking your full RMD on time is steep: 50% of the amount you should have withdrawn but didn’t.
But you can meet the IRS requirements and overcome some of the drawbacks in other ways, including payments from a fixed annuity
, which can provide you with income for life. And it may reduce the hassle of tracking how much you need to withdraw each year.
Any amount you convert to an annuity payment satisfies your RMD, and then the amount no longer figures into that calculation after you convert it. An annuity can provide a stream of lifetime income so you don’t need to worry about outliving your money.
You may already have annuity assets available in your TIAA retirement plan or IRA—check with your employer or log in to your TIAA account to see if you do.