Rollover IRA Explained: A Complete Guide to Moving Your 401(k)
A rollover IRA allows you to transfer money from an employer-sponsored retirement plan, like a 401(k), into an Individual Retirement Account while maintaining its tax-deferred status. This account type offers broader investment options and potentially lower fees compared to traditional employer plans.
Benefits of a Rollover IRA
- Consolidates old 401(k)s into one account
- Provides more investment choices
- Often features lower administrative fees
- Maintains tax advantages of retirement savings
Rollover IRA Process in 3 Steps:
- Choose Your IRA Type
- Traditional IRA: Tax-deductible contributions, taxed withdrawals in retirement
- Roth IRA: After-tax contributions, tax-free qualified withdrawals after age 59½
- Select a Provider
- Online broker: For self-managed investments
- Robo-advisor: For automated portfolio management
- Transfer the Funds
- Request direct rollover from previous plan administrator
- Ensure funds go directly to new IRA provider
- Follow provider's specific instructions for transfer
Important Tax Considerations
- Direct rollovers have no immediate tax implications
- Indirect rollovers must be completed within 60 days
- 20% tax withholding applies to indirect rollovers
- Complete amount must be deposited to avoid penalties
Contribution Rules
- Regular IRA contribution limits ($7,000 in 2025, $8,000 if 50+) apply separately from rollover amounts
- Income limits affect Roth IRA contribution eligibility
- Traditional IRA deduction limits depend on income and workplace retirement plan access
Investment Options
- Low-cost index mutual funds and ETFs recommended for most investors
- Target-date funds offer simplified portfolio management
- Robo-advisors provide automated investment selection and rebalancing
Remember: Withdrawals before age 59½ typically incur taxes and a 10% penalty unless qualifying exceptions apply. There's no limit on rollover amounts, and you can maintain multiple rollover IRAs, though consolidation may simplify management.