What Is a Rollover IRA?

A rollover IRA allows you to move assets from an old employer-sponsored retirement account to an individual retirement account. This lets you maintain the tax-deferred status of your retirement funds. Direct rollovers carry fewer tax considerations than indirect rollovers.

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Rachel Christian
Rachel Christian
Financial Writer and Certified Educator in Personal Finance
Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.
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Published: January 19, 2021
Updated: August 29, 2023
5 min read time
This page features 5 Cited Research Articles

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Understanding Rollover IRAs: The Basics

Many people save for retirement by opening a 401(k) or similar employer-sponsored plan at work.

But where does that money go when you leave your current job?

You usually have four choices. There are pros and cons to each.

Four Options on What to Do with an Old 401(k) Plan

Keep some or all your 401(k) savings in your former employer’s plan.
Transfer your old 401(k) to your new employer’s plan, if the option is available.
Rollover your current 401(k) to an IRA.
Cash out your current balance.

A rollover IRA is an account used to transfer money from a former 401(k) or other employer-sponsored retirement account to an individual retirement account.

An IRA rollover lets you maintain the tax-deferred status of your retirement assets. It also lets you avoid current taxes and early withdrawal penalties when you transfer funds.

Direct vs. Indirect Rollover IRAs

There are two IRA rollover methods — direct and indirect.

If you request a direct rollover, your former employer will send your 401(k) assets directly to your new employer’s plan or to an IRA. You don’t have to handle the money yourself.

This is the simplest option.

However, not every plan provider will do a direct rollover.

An indirect IRA rollover requires you to request a lump-sum distribution from your plan administrator and then move the money to your new IRA provider yourself within 60 days.

You are solely responsible for completing the transfer. But be careful — an indirect rollover can expose you to complex tax consequences.

For example, you will not receive your full 401(k) balance if you request an indirect rollover. The plan provider is required to withhold 20 percent to ensure that taxes are still paid if you fail to properly complete the transfer.

If you want to defer taxes on the full amount you cashed out, you must add additional funds from somewhere else to equal the 20 percent withheld by the plan administrator.

If you correctly complete the transfer within 60 days, the withholding will be returned to you when you file your tax return for the year.

If you miss the 60-day deadline, the IRS will likely consider it an early withdrawal. This can expose you to income tax as well as a 10 percent early withdrawal penalty if you are younger than 59.5.

How Does a Rollover IRA Work?

A rollover IRA allows you to transfer money from a 401(k) without losing the benefit of delaying your tax bill until retirement.

Here’s how to make it happen.

How to Rollover an IRA

Choose a Retirement Account Type: According to the Financial Industry Regulatory Authority, the type of your old 401(k) determines what kind of IRA you need to move your funds into. You can pick either a traditional IRA or a Roth IRA. If you want to keep things simple and minimize taxes, roll a Roth 401(k) into a Roth IRA and a traditional 401(k) into a traditional IRA.
Select a Rollover IRA Provider: You can use an existing IRA for your rollover. Or you can open a new one at a financial institution, online brokerage or robo-advisor. Look for rollover IRA providers with low fees, broad investment options and good customer service.
Transfer the Money: Contact your former employer’s plan administrator and request a direct rollover. They will give you a form to fill out to begin the process. The new account provider will give you instructions on how the check or wire should be made out, what information should be included and where the money needs to go.

There is no limit on the amount of money you can rollover to an IRA. However, be mindful of annual contribution limits moving forward.

Contributions to an IRA are limited to $6,000 a year or $7,000 for people 50 and older.

Choosing Rollover IRA Investments

IRAs typically offer a much broader range of investment options compared to 401(k) plans.

Common Investments Available in IRAs

Stocks
Bonds
Certificates of deposit, or CD
Mutual funds
Exchange-traded funds, or ETFs
Annuities

Can you roll your IRA or 401(K) into an annuity?

You may also be able to explore alternative investments such as real estate and cryptocurrency if you rollover your 401(k) to a self-directed IRA.

It’s important to understand your investing style and risk tolerance. Consider how active a role you want to play in managing your new investments.

You can take a hands-on approach and select investments that align with your personal asset allocation goals.

Nearly all major brokerage accounts offer free tools and resources to guide you.

Tip

Even if a financial institution advertises free IRA rollovers, be aware that you will still likely face account administration and/or investment management costs.

Source: Financial Industry Regulatory Authority

Or you may choose to take a more passive approach.

If you invested in a target-date fund in your 401(k), you’ll be able to find a similar fund for your IRA.

Target-date funds are widely divested and based on your age. These funds automatically rebalance themselves over time and gradually reduce your stock exposure as you near retirement.

Major brokerage companies, such as Fidelity, Vanguard and Charles Schwab, also offer personalized planning and professional management services.

Keep in mind that these services charge advisory fees. You may also need a specific minimum account balance to qualify.

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Last Modified: August 29, 2023

Rachel Christian Financial Writer and Certified Educator in Personal Finance

Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics for RetireGuide. Rachel’s clear and concise writing style breaks down complex retirement topics and provides relevant information to our readers.