When it comes to saving for the future, few options are as popular or as proven as an individual retirement arrangement (IRA). Thanks to their accessibility, flexibility, and tax advantages, IRAs are crucial to many retirement savings strategies.
While IRAs are straightforward, the process of moving your hard-earned funds comes with several rules and conditions. You might ask questions like, “Can I transfer my IRA to a savings account?” or “What penalties come with an early withdrawal?” In this article, we’ll examine what you need to know about IRA transfers so you can make the best financial decision.
How does an IRA work?
An IRA is a long-term savings arrangement offering individuals tax-deferred or tax-free growth, depending on the type of account. Anyone currently earning income can contribute to an IRA—even people with a 401(k) savings plan through their employer. The deposits within an IRA are typically invested in a range of financial products, including stocks, bonds, and mutual funds.
At some financial institutions like Discover®, you can even open an IRA savings arrangement or an IRA certificate of deposit (CD). These IRAs offer the reliability of traditional bank accounts while still providing important tax advantages.
To reap these tax advantages, you can choose between two types of IRA arrangements: Traditional and Roth IRAs. In a Traditional IRA, you’ll contribute pretax dollars, reducing your immediate taxable income but increasing it in retirement when you withdraw the money. Roth IRAs don’t come with an immediate tax benefit—you’ll make contributions with after-tax dollars—but as a result, you won’t owe taxes when it comes time to withdraw the money in retirement.
Whether you have a Traditional or a Roth IRA or an IRA savings arrangement (or all of the above), there is a maximum combined contribution limit across all your IRA arrangements. In 2024, the annual contribution limit is $7,000 if you’re under the age of 50 or $8,000 if you’re age 50 or older.
Tip: If your income is too high, you will not be eligible to contribute to a Roth IRA. As of 2024, per the IRS, the income limits are between $146,000 and $161,000 per year for a single tax filer and between $230,000 and $240,000 for those married and filing jointly.
Can you withdraw money from an IRA?
Because this money is meant for retirement, withdrawing from an IRA before age 59½ may come with taxes and penalties. For example, if you take an early withdrawal from your Traditional IRA, you’ll likely owe income tax on that amount and trigger a 10% penalty (unless your withdrawal is for one of the reasons considered to be an exception by the IRS).
The rules for withdrawals from a Roth IRA are more forgiving, as you can withdraw all contributions to a Roth IRA at any time without taxes or penalties. You may owe taxes and penalties on the earnings, however, if you withdraw those funds before age 59½ or before the IRA has been open for at least five years unless an exception applies.
Make sure you understand the rules before making any early withdrawal from an IRA, and seek professional guidance as needed.
How to transfer funds from one IRA to another
As long as you transfer money from one Traditional IRA to another Traditional IRA—or from one Roth IRA to another Roth IRA—you won’t trigger any income tax bill or penalties. To move your IRA—a process sometimes called a “rollover”—contact the financial institution where you hold your IRA and tell them where you want to move your funds.
Keep in mind that transferring funds from a Traditional IRA into a Roth IRA may trigger an immediate tax bill but no early withdrawal penalty. Also, any transfers must be deposited into the new IRA within 60 days, and only one transfer may be made per 12-month period.
Consider the following account types you may want to transfer your IRA into:
1. IRA Savings
An IRA savings arrangement combines the predictable earnings of a savings account with the tax benefits of an IRA. As mentioned before, like any other IRA, gains in an IRA savings arrangement are either tax-deferred or tax-free, which means your money compounds more quickly. And that can help you build your nest egg faster.
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2. IRA CD
Another option to consider is investing your money into an IRA CD, which offers a fixed interest rate tied to the length of the CD term. Discover IRA CDs, for example, offer a range of interest rates depending on the term you select—ranging from three months to 10 years.
IRA CDs can effectively reduce the risk to your money by combining the guaranteed interest rate of a CD with the tax advantages of an IRA. These may be especially helpful as you get closer to retirement.
Can you transfer your IRA to a savings account?
What if you need early access to your IRA savings? Moving funds from an IRA to a traditional savings account typically counts as an early withdrawal, which means the money would be subject to the taxes and penalties we discussed before.
A few exceptions may limit taxes and penalties when transferring your IRA to a savings account. For example, if you have a permanent disability, incur unreimbursed medical expenses beyond a set threshold, qualify for higher education expenses, or are a first-time homebuyer, you may be able to avoid the penalties that come with early withdrawals.
However, these exceptions—and a few others—come with several qualifying factors and distribution rules, and it’s recommended that you consult with a financial expert before engaging in this kind of transfer of IRA funds.
What are the long-term impacts of early withdrawal?
Stick to your retirement strategy and avoid dipping into your IRA funds as much as possible. Early withdrawals typically come with a hefty penalty, and the additional taxes you pay can even negate the interest you’ve earned.
An IRA is a valuable part of your retirement planning thanks to the tax advantages it offers. Leaving those funds alone to hopefully grow over time puts you on a path to having enough money during your retirement.
Make IRAs part of your long-term financial goals
As you plan for retirement, funding an IRA can help set yourself up for long-term success. Which IRA you choose to fund and if, at some point, you opt to transfer your IRA to a different account will largely depend on your financial standing, your aversion to risk, and how close you are to retirement age.
Whether an IRA is your primary means of saving for the future or just one of several tools in your savings plan, it can be a valuable way to help you achieve your retirement goals.
Don’t wait to get started saving for retirement. If you’re ready to reap the benefits of tax advantages, compounding interest, and low risk, consider opening a Discover IRA Savings Arrangement today and see how it can help you reach your financial goals.
This article is for informational purposes only and is not intended as a substitute for professional advice. For specific advice about your unique circ*mstances, you may wish to consult a qualified professional, at your expense.
Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsem*nt, or verification regarding the third party or information.
This article is for informational purposes only and is not intended as a substitute for professional advice. For specific advice about your unique circ*mstances, you may wish to consult a qualified professional, at your expense.
