What Is a Rollover IRA?

Most people roll over their IRAs into new accounts upon changing jobs or retirement.

Written by Casey Bond / July 11, 2022

Quick Bites

  • When you leave a job, you can take your retirement plan with you.
  • That’s what’s called a rollover IRA–you roll it from one account to another.
  • The good news is that if you do rollover your IRA, you won’t be taxed at that time.

When you leave a job, you probably aren’t going to be allowed to hang onto your company-issued MacBook or ergonomic desk chair. But if you have money sitting in an employer-sponsored retirement account, you do have several for taking that money with you, including rolling it into an IRA.

Before you do, however, it’s a good idea to learn how rollover IRAs work and if that’s the best option for you.

Inside this article

  1. What is a rollover IRA?
  2. Options for your old 401(k)
  3. How to transfer
  4. Contribution rules
  5. Tax rules

What is a rollover IRA?

A rollover IRA lets you move money from an old employer-sponsored retirement plan into a new IRA. This lets you keep the tax-deferred status of the money in the account, meaning you won’t have to pay any taxes or early withdrawal penalties in order to move the money.[1] Plus, IRAs can be opened by individuals without the involvement of their employers.

“By rolling the money from the former employer's retirement plan to the rollover IRA, the funds can continue to grow for retirement without being taxed or penalized,” says Matthew Stratman, lead financial advisor at South Bay Planning Group. It’s typically not required that you roll over your retirement funds when you leave an employer. “Some people choose to do so for flexibility and financial control.”

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Some benefits of moving to a rollover IRA:

  • Reduce administrative fees

  • Simplify the number of accounts to manage and even

  • Open up more investing options

“While most workplace retirement plans offer a wide range of mutual funds, the selection is still limited to the options within the plan,” Stratman says. “On the other hand, a rollover IRA may choose from individual stocks, bonds, ETFs, and many other investment choices that may not be offered within the old retirement plan.”

Options for your old 401(k)

Putting your money in a rollover IRA is just one of many ways to handle retirement funds when you leave a job. Here’s a closer look at your options when you have an old 401(k):[2]

  • Roll over to your new employer's plan. If your new employer provides an employer-sponsored retirement plan, you may be able to do a direct rollover from your former plan. Not all employers allow this, though.

  • Leave it in place. Some employers will let you leave your money sitting in the 401(k) after you leave. Your money will continue to grow tax-free until you’re required to make withdrawals in retirement. However, you won’t be able to make any future contributions to the plan.

  • Cash out. Technically, you can take the money out of your old 401(k) and keep the cash. However, that’s ill advised. If you withdraw the money before you reach age 59 ½, you’ll be responsible for paying income taxes on the full amount, plus a 10% penalty.

  • Roll over to an IRA. Finally, you can roll the money into a new IRA. This may be a good option if you aren’t able to move the money into a plan with your new employer.

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How to make that transfer to the rollover IRA

Stratman noted that usually, your old 401(k) administrator will send a check directly to the new custodian for the IRA.

“This way, the money is not going directly to the investor and will not be taxed,” he says. This is known as a direct rollover.[3]

However, If the old 401(k) provider does send the money to you rather than the new custodian, you have 60 days to deposit the funds into the new IRA to avoid taxes or penalties (more on that later).

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Contribution rules

You can continue to contribute to your rollover IRA. There are, however rules, says Sallie Mullins Thompson, principal and managing member at Sallie Mullins Thompson, CPA PLLC.

Contribution limits

For tax years 2019 through 2022, the total amount of money you contribute to all of your traditional IRAs and Roth IRAs in one year can't be more than: [4]

  • $6,000 (or $7,000 if you're age 50 or older)

  • If less, your taxable compensation for the year

If you make an excess contribution to a rollover IRA, that amount is taxed at 6% per year, for each year the excess funds stay in the account.

Income limits

Depending on the type of IRA you have, contributions might also be subject to income limits. For traditional IRAs, there are none. However, if you rollover IRA is a Roth, you can only contribute if your modified adjusted gross income (MAGI) meets certain caps:

If your filing status is single, head of household or married filing separately (and you did not live with your spouse at any time during the year), for example, you can contribute up to the maximum as long as your MAGI is less than $129,000. If your MAGI is over $129,000 but less than $144,000, you can contribute a reduced amount. And if your MAGI is over $144,000, you aren’t allowed to contribute funds to your rollover Roth IRA.[5]

Tip

Modified adjusted gross income (MAGI) is your Adjusted Gross Income (AGI) plus a few items—like exempt or excluded income and certain deductions. Your AGI is defined as gross income minus adjustments to income.[6]

Tax rules

There are generally no tax implications to worry about when you do a direct rollover (or trustee-to-trustee rollover from an existing IRA). However, if your old retirement funds are sent directly to you, there is a 60-day window for redepositing the money into your rollover IRA without being taxed.

Any part of that distribution that isn’t redeposited within 60 days is subject to income taxes and early withdrawal fees, with a few exceptions.

It’s also important to note that generally, you can’t make more than one rollover from the same IRA within a 12-month period. This doesn’t apply to rollovers to a Roth IRA, though (also known as a Roth conversion).

Article Sources
  1. “What is a Rollover IRA?” Charles Schwab. https://www.schwab.com/ira/rollover-ira/what-is-a-rollover-ira.
  2. “Considerations for an old 401(k).” Fidelity. Aug. 27, 2021 https://www.fidelity.com/viewpoints/retirement/what-to-do-with-an-old-401k.
  3. “Rollovers of Retirement Plan and IRA Distributions.” IRS. June 16, 2022. https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions.
  4. “Retirement Topics - IRA Contribution Limits.” IRS. Nov. 27, 2021. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.
  5. “Amount of Roth IRA Contributions That You Can Make for 2022.” Nov. 5, 2021. https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022.
  6. “Definition of Adjusted Gross Income.” IRS. https://www.irs.gov/e-file-providers/definition-of-adjusted-gross-income#:~:text=Adjusted%20Gross%20Income%20(AGI)%20is,as%20well%20as%20other%20incomehttps://www.irs.gov/e-file-providers/definition-of-adjusted-gross-income#:~:text=Adjusted%20Gross%20Income%20(AGI)%20is,as%20well%20as%20other%20income.

About the Author

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Casey Bond

Casey Bond is an award-winning writer who has been covering personal finance for more than a decade. Her work has also appeared on Yahoo!, Money.com, Fortune, MSN, Business Insider, The Motley Fool, U.S. News & World Report, Forbes, TheStreet, and more. She is a Certified Personal Finance Counselor.

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