What Is a Rollover IRA? Everything You Need To Know

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If you’ve recently left a job or retired, you may be wondering what to do with your old 401(k). One of the most popular options is opening a rollover IRA — a tax-advantaged account that lets you move funds from a workplace retirement plan into an IRA without triggering taxes or penalties when done correctly.

This simple move can give you more control, lower fees and a wider range of investments.

Quick answer: The safest choice is almost always a direct rollover, where your old employer’s plan sends money straight to your IRA provider. No tax withholding. No 60-day deadline stress.

How a Rollover IRA Works

Let’s dig into the details you’ll need to know to figure out if a rollover IRA is right for you!

What Qualifies as a Rollover?

A rollover means transferring money from a tax-deferred plan (like a 401(k), 403(b) or TSP) into an IRA.

• Direct rollover (best option): Money goes directly from the old plan to the IRA custodian.
• Indirect rollover (risky): The plan cuts you a check, and you must redeposit the full amount into an IRA within 60 days.

You can roll over:

• 401(k)
• 403(b)
• 457(b)
• Federal Thrift Savings Plan (TSP)
• Another IRA (special rules apply for IRA-to-IRA moves).

Tax Treatment

Handled properly, a rollover IRA has no immediate tax consequences. The funds keep growing tax-deferred (traditional IRA) or tax-free if later converted to a Roth IRA.

Direct vs. Indirect Rollovers: Why It Matters

Key IRS Rules To Know:

• 60-day rule (indirect only): Miss it and the funds become taxable. If you’re under 59½, you’ll also face a 10% penalty.
• One rollover per 12 months (IRA-to-IRA indirect only): Violate this and the second transfer is taxed.

Messing up these rules often leads to unexpected tax bills, so doing things correctly is important for your financial future. Check the IRS guidelines to make sure you’re on the right track.

When Should You Use a Rollover IRA?

A rollover IRA makes sense in several common situations:

1. You Left Your Job And Want To Consolidate Accounts

Rolling over prevents “orphan” accounts from getting lost. The Bureau of Labor Statistics reports the median job tenure is 4.1 years, meaning most workers will have multiple retirement accounts across a career.

2. Your Old 401(K) Has Limited Investments

Employer plans often offer just a few mutual funds. IRAs open the door to thousands of ETFs, bonds, CDs and individual stocks.

3. You Want Lower Fees and More Control

Employer 401(k)s often have higher plan costs. The average 401(k) plan fees run about 0.45% of assets annually (Investment Company Institute). Reducing fees by even half a percent could save tens of thousands of dollars over 20 years.

4. You need flexibility for retirement income

IRAs make it easier to time withdrawals and plan Roth conversions around your income. Under SECURE 2.0, required minimum distributions (RMDs) now start at age 73, and will rise to 75 for those born in 1960 or later.

Rollover IRA vs. Leave in 401(k) vs. Cash Out

Can you convert a rollover IRA to a Roth IRA?Yes, it’s called a Roth conversion. You’ll owe income tax on the converted amount that year, but all qualified future withdrawals will be tax-free.

How To Open and Fund a Rollover IRA

1. Pick a provider. Top custodians include Fidelity, Vanguard, Schwab and E*TRADE. Look for low fees and strong investment options.
2. Open a rollover IRA. Note that it’s for a rollover during setup.
3. Request a direct transfer. Tell your old plan administrator to send funds directly to the new custodian.
4. Avoid taking possession of funds. If you receive a check, it must be redeposited within 60 days — including the 20% withheld, which you’ll need to cover from cash.

Retirement accounts are Americans’ biggest nest egg — IRAs hold over $18 trillion in assets, more than any other retirement vehicle. Making the most of yours is essential for your financial future.

Benefits of a Rollover IRA

• Broader investment choices than most 401(k)s
• Lower potential fees, saving thousands long-term
• Simplified retirement planning by consolidating accounts
• Flexibility to convert to Roth in low-income years

Common Mistakes To Avoid

• Missing the 60-day rule: Leads to taxable income and a possible 10% penalty.
• Mixing pre-tax and after-tax funds incorrectly: Track after-tax contributions with IRS Form 8606.
• Forgetting RMDs at 73: Missed RMDs trigger a 25% penalty (reduced to 10% if corrected quickly).
• Rolling over employer stock without considering NUA: You could lose out on lower long-term capital gains rates.

Final Take to GO: Is a Rollover IRA Right for You?

If you’ve recently changed jobs or retired, a rollover IRA is often the best way to protect your money, cut costs and keep your savings growing tax-deferred. The key is to handle it correctly — preferably with a direct rollover.

Next step: Run projections with the GoBankingRates Retirement Calculator to see how consolidating accounts and lowering fees could boost your retirement nest egg.

Information is accurate as of Sept. 29, 2025.

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