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“What’s the difference between a contributory IRA and a rollover IRA?”


The first type of individual retirement account is one to which a taxpayer makes contributions. The maximum that can be salted away each year is the lesser of $5,000 ($6,000 if you’re at least 50 years old) or your taxable earned income (salary, commissions etc.).
Contributions to a so-called traditional IRA are fully deductible from federal and state income tax if you’re not covered by a retirement plan at work, such as a 401(k). If you are covered by a workplace plan, IRA contributions are still fully deductible if your income, with certain adjustments, is no more than $55,000 and you file as an individual or $89,000 if married and filing jointly. Partial deductions are allowed for single and joint filers with income between those levels and $65,000 or $109,000, respectively. (Another type of account, a Roth IRA, has different rules on taxation and contribution and income limits.)

A rollover IRA is a destination for assets that have been accumulated elsewhere, typically in a former employer’s retirement plan. Setting up a rollover IRA is simple enough, usually a matter of filling out forms for the administrator of the plan you’re leaving and for the new institution. One critical step is to request a “direct rollover,” in which you ask the former plan administrator to transfer the proceeds to their new home. If the assets take a detour into your hands, bad thing can happen: A significant portion may be withheld for potential tax liability, and if you neglect to complete the transfer within 60 days, the IRS may decide that you have taken a taxable distribution. That means the liability will be real – and probably very expensive – and not just potential anymore.

-Conrad de Aenlle