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What is a Rollover IRA?

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In 1974, the Employee Retirement Income Security Act (ERISA) was born. ERISA legislated regulations for pension, retirement, benefit and healthcare plans as well as established the Individual Retirement Account (IRA).

IRAs: What Are They?

As an incentive for individual taxpayers to save privately for their own retirements, ERISA allowed for up to a $2,000 tax deduction (now $6,000) if that amount were deposited into an IRA.

For over a decade, the IRA deduction was a no-brainer for tax preparers as the deposit could be made on the filing date, April 15, and taken as a deduction from taxable income for the previous year.

A $2,000 IRA contribution could mean over $1,000 tax savings at 1970s tax rates. But the Tax Reform Act of 1986 phased out deductions for high-income taxpayers who were also covered by an employer’s ERISA qualified plan like a 401(k).

Why IRAs are Advantageous

The tax deduction makes the IRA a popular retirement strategy, but it is the deferral of taxation on annual earning that makes the IRA a superior long-term wealth builder.

The IRA account holder does not pay income or capital gains tax on annual IRA investment earnings. Instead, the IRA holder pays ordinary income tax on distributions taken in retirement.

A Baby Boomer born in 1946 who deposited $2,000 per year into an IRA account earning an average 10% would have amassed over $973,000 when the required minimum distribution (RMD) activated at age 70½ in 2016.

The account holder would then be required to withdraw at least 5% or over $48,000 per year. But an investor using a taxable account would have accumulated under $490,000 and a first annual payment of less than $25,000.

Source: https://aarp.com

IRAs: Tax Distribution

A withdrawal from an IRA by an investor who is younger than 59½ is subject to a 10% tax penalty in addition to ordinary income tax. A distribution taken from an IRA or other ERISA-qualified account and re-deposited into another or the same qualified account within 60 days of the distribution date qualifies as a tax-free “rollover.”

Source: www.irs.gov

A Rollover IRA is an Individual Retirement Account that has been established to receive a distribution from another ERISA-qualified account. Retirement accounts can be consolidated using a Rollover IRA as the collection point. Consolidation limits investment expenses and simplifies management for the individual investor.

How to Choose Where to Rollover Your IRA

A Rollover IRA should allow you to efficiently change investments and strategy as lifestyle and physical needs change and should offer a wide variety of quality mutual funds in the early asset-building years. As you accumulate more assets and experience, common stocks may become more attractive.

But when you, as an IRA investor, are nearing retirement, bonds may be more appropriate securities for safety and income. Passive investment management by an algorithmic investment manager may be more appropriate if you’re uninterested in the vagaries of the market.

Broker Best For Commissions Account Minimum Choose your platform
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1 Minute Review

This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.

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eTrade
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E*TRADE is an online discount trading house that offers brokerage and banking services to individuals and businesses. One of the first brokers to embrace online trading, E*TRADE not only survived both the dot-com bubble and Recession — it thrived. You can choose from two different platforms (one basic, one advanced). E*TRADE is a suitable broker for traders of most skill levels, whether you want to buy mutual funds and hold them for decades or dabble in options swing trading. E*TRADE offers a library of research and education materials to help you out.

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Fidelity Investments
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1 Minute Review

Fidelity is a comprehensive and responsive brokerage suitable for both new and experienced traders alike. With complete access to the full U.S. stock and options markets, a set of state-of-the-art education and research tools, as well as a wide fee-free fund selection, Fidelity is equally useful for the veteran swing traders to novices opening their first accounts. Mobile traders will be especially happy with Fidelity’s app, which mirrors full capabilities of the platform. Though there isn’t much to criticize about Fidelity, the broker does have a few areas where it can afford to improve. Margin rates are significantly higher than most other brokers, especially for traders borrowing less than $25,000. It also doesn’t offer any access to the futures markets. Despite these minor flaws, Fidelity remains a strong choice for most investors.

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Merrill Edge
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1 Minute Review

Merrill Edge is the discount brokerage wing of Merrill Lynch, who now operates under the umbrella of Bank of America. Bank of America customers get unique perks with Merrill Edge thanks to its fully-integrated system. Customers can jump back and forth between brokerage and banking services instantly and perform tasks like transferring money and paying bills.

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Final Thoughts

Every individual who prepares for retirement must take advantage of tax-deferred saving wherever possible. Accumulated retirement funds are most efficiently managed in one flexible, accessible and trusted account.

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