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Guilherme Mazui

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What is the Difference Between Rollover IRA and Roth IRA?

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The main difference between a rollover IRA and a Roth IRA lies in their tax treatment and the types of contributions they accept. Here are the key differences:

  • Contributions: A Roth IRA is a retirement savings account into which you make after-tax contributions that can later be withdrawn tax-free. On the other hand, a rollover IRA can be either a traditional IRA or a Roth IRA into which you roll over assets from a former employer's retirement plan such as a 401(k).
  • Tax Treatment: With a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. In contrast, with a traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½.
  • Rollover Contributions: There isn't technically such a thing as a Rollover IRA; it's actually a type of tax-free distribution from one retirement plan to another. When you roll over, you can choose to roll over into one of the two types of IRAs: Traditional IRAs or Roth IRAs.

In summary, a Roth IRA uses after-tax contributions, while a rollover IRA is an account used to move money from old employer-sponsored retirement plans and can be either a traditional or Roth IRA. The tax treatment of withdrawals is different for each type of IRA, with Roth IRAs being tax-free and traditional IRAs being taxable.

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  • What is the Difference Between Rollover IRA and Roth IRA?
  • Comparative Table: Rollover IRA vs Roth IRA

    • Comparative Table: Rollover IRA vs Roth IRA

    Here is a table comparing the differences between a Rollover IRA and a Roth IRA:

    Feature Rollover IRA Roth IRA
    Purpose Used to move funds from employer-sponsored retirement plans into an IRA. A type of IRA that allows tax-free withdrawals in retirement.
    Taxation Contributions may be tax-deductible, depending on the taxpayer's income. Contributions are not tax-deductible.
    Withdrawals Withdrawals are taxed at the account holder's income tax rate in retirement. Withdrawals are tax-free in retirement, provided certain conditions are met.
    Contribution Limits Limited by annual IRA contribution limits, which are $7,000 for 2024, or $8,000 if age 50 or older. Further restricted based on the account holder's income.
    Investment Options Can provide a wider range of investment options compared to 401(k) plans. Offers more investment options than employer-sponsored plans.
    time to withdrawal penalty free Subject to a 10% early withdrawal penalty if withdrawn before age 59 1/2, but there are some exceptions. Subject to a 10% early withdrawal penalty if withdrawn before age 59 1/2 and the account has been open for less than five years from the first Roth contribution.

    Please note that a Roth IRA can be converted into a Rollover IRA, but the tax implications and eligibility rules may differ.

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    Guilherme Mazui

    Guilherme Mazui is graduated in journalism from the Federal University of Minas Gerais (UFMG) and a master's degree in Communication from the University of São Paulo (USP). In addition, he has experience in advertising writing and has worked as a content editor in several companies.