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What is a rollover IRA and how does it work?

Avoid taxes and penalties when you move funds from one retirement account to another.

Employer-sponsored retirement plans like the 401(k) offer some of the best ways to save for retirement. Contributions are automatic, contribution limits are relatively high and employer matches can help grow your money faster.

But sometimes, it makes sense to move the money from your employer’s retirement plan to an individual retirement account (IRA). Known as a rollover IRA, let’s explore when you might consider a rollover and what you need to do to complete the process.

What is a rollover IRA?

A rollover IRA offers a non-taxable and penalty-free way to transfer money to an IRA from an old employer-sponsored retirement plan, such as a 401(k), 403(b) or 457(b). A rollover IRA preserves your money’s tax-deferred status and lets you still make contributions toward your retirement without paying taxes on the distribution or early withdrawal penalties at the time of transfer.

Why choose a rollover IRA?

You might consider a rollover IRA if you’re in a 401(k) or other employer-sponsored retirement plan with limited investment choices and high fees or want to consolidate and track your retirement money in one place. Another reason to choose a rollover IRA is if you’ve left an employer, either through a job change or retirement.

Compared to a 401(k), which primarily invests in mutual funds, rollover IRAs can offer access to more securities with few or no fees. For example, the average mutual fund expense ratio was 0.44% in 2022, whereas the average exchange-traded fund (ETF) expense ratio was 0.16%.(1) The exact costs and fees depend on your investment choices, so compare the fees of what you might invest in to your current holdings in your employer retirement plan before making the transfer.

How to roll over an employer-sponsored retirement plan to an IRA in 4 steps

If you’re ready to roll over your 401(k) or another employer-sponsored retirement plan to an IRA, you have a few steps to complete. The process is generally straightforward once you choose an IRA provider and consider the tax implications of your options.

1. Choose a rollover IRA account type

If you don’t already have an IRA, you’ll need to open one. Transferring to an IRA of the same structure — pre-tax 401(k) to pre-tax IRA or Roth 401(k) to Roth IRA — is the easiest way, as it preserves the tax structure of the money. Here are the IRAs you should consider for your rollover depending on the money in your old retirement plan:

If your account has …Then consider …
Only pre-tax contributionsOpening a traditional IRA
Both pre-tax contributions AND post-tax contributionsOpening a traditional IRA for the pre-tax money AND a Roth IRA for the post-tax money
Only post-tax contributionsOpening a Roth IRA
Pre-tax contributions, but you would like to convert your money into post-tax contributionsOpening a Roth IRA, but know that rolling pre-tax money into a Roth IRA is a Roth conversion and is a taxable event

2. Compare and select an IRA provider

Banks, brokers and other financial institutions can act as IRA custodians, but not all accept rollover contributions.

In choosing an IRA provider, consider who you want to invest the money in your rollover IRA: you or a financial adviser. If you want to take a hands-on approach to building your portfolio and pick stocks and other investments, a regular IRA will do. However, if you want professional help to determine your investment plan or manage your portfolio on your behalf, you might consider an IRA provider that offers financial advisery services, whether that’s from a human or robo-advisor. A robo-advisor is an algorithm that constructs and manages an investment portfolio on your behalf based on your responses to questions about your financial goals, time horizon and risk tolerance.

3. Contact your old retirement plan provider and request a rollover

You need to contact your retirement plan provider to request a rollover. If you’re unsure who your old 401(k), 403(b) or 457(b) provider is, the name should be on your account statements. If you can’t access your account statements, consider a 401(k) search service like Beagle to locate all your old 401(k)s.

Call your old plan provider or initiate the rollover process online. You’ll need to complete paperwork, and different providers may require different documents. You then have two options to complete the rollover:

  • Direct rollover. Your old retirement plan servicer makes the payment directly to your rollover IRA provider. You’ll need to supply the name of your rollover IRA provider and your rollover IRA account number.
  • 60-day rollover. Your old retirement plan provider issues the payment to you, less a mandatory 20% withholding for taxes, and you deposit all or a portion of the funds in your rollover IRA within 60 days. You will need to make up the 20% that was withheld when you deposit the money to avoid paying taxes. If you fail to deposit the money within 60 days, your retirement funds will be subject to income taxes and a 10% penalty if you’re under the age of 59.5. A check sent to you that’s payable to the rollover IRA provider is not subject to taxes.(2)

4. Invest the money

The rollover process technically ends once the money is deposited into your IRA. However, unless you choose a financial adviser or robo-advisor to manage your IRA, you’ll need to invest your money.

Review your asset allocation across your entire investment portfolio — all your IRAs and employer-sponsored retirement plans — to determine what securities to purchase. Many financial experts recommend a portfolio of 60% stocks and 40% bonds. However, an optimal portfolio allocation for you will depend on your age, risk tolerance and financial goals.

Rollover IRA considerations

Before initiating a rollover IRA, consider the tax structure of the money you’re transferring so you aren’t surprised by any tax consequences that may come in the process. Unless you want to convert pre-tax contributions to post-tax contributions, roll over pre-tax funds to a traditional IRA and post-tax funds to a Roth IRA. A direct rollover, where your old plan provider sends the money directly to your rollover IRA provider, will let you avoid taxes and penalties on the transfer.

There’s no limit to how much you can roll over into an IRA. Rolling over funds from an old employer-sponsored retirement plan to an IRA does not affect your annual IRA contribution limit. (3)

What else you can do with an old 401(k) or retirement plan

A rollover IRA is one option you have when it comes to managing the money in your old employer-sponsored retirement plan. Depending on your situation, you may consider these other options:

  • Leave the money where it is. If your previous employer’s 401(k) or other retirement plan lets you maintain your account after leaving your job and you’re satisfied with the plan’s investment options, you can leave the money alone.
  • Roll it into a new retirement plan. If you’ve started a new job that offers a retirement plan and the new provider accepts rollover contributions, you can consolidate your employer-sponsored retirement plans under one roof.
  • Cash it out. You can cash out your retirement plan, but the IRS will tax the distribution, and you may incur early withdrawal penalties. Your money will also lose any future compound growth, which can significantly impact your ability to reach your retirement goals.

Compare brokerages that offer IRA accounts

Narrow down top brokers by annual fee, stock trade fee and more to find the best for your budget and financial goals.

1 - 6 of 6
Name Product Minimum deposit Annual fee Retirement account types
SoFi IRA
Finder Score: 4.2 / 5: ★★★★★
SoFi IRA
$0
$0 per month
Roth, Traditional, SEP, Rollover
Trade stocks, options, ETFs, mutual funds and alternative asset funds, with no-cost financial advice and a no-cost robo-advisor.
JP Morgan Personal Advisors
Finder Score: 3.3 / 5: ★★★★★
JP Morgan Personal Advisors
$25,000
0.6% on balances of $25,000 to $249,999

0.5% on balances of $250,000 to $1,000,000

0.4% on balances of $1,000,000+
Roth, Traditional
Ongoing access to an advisory team with personalized, expert-built portfolios. Provider terms & conditions apply
Robinhood Retirement
Finder Score: 4.4 / 5: ★★★★★
Robinhood Retirement
$0
0%
Roth, Traditional, Rollover
Boost your retirement savings with 1% in matching funds on every dollar contributed, transferred or rolled over to a Robinhood IRA.
Vanguard IRA
Finder Score: 4 / 5: ★★★★★
Vanguard IRA
$0
0.3%
Roth, Traditional, SEP, Spousal, Rollover
Save for retirement with Vanguard's commission-free stocks, ETFs and 160+ no-transaction-fee mutual funds.
Interactive Brokers IRA
Finder Score: 4.5 / 5: ★★★★★
Interactive Brokers IRA
$0
N/A
Roth, Traditional, SEP, Rollover
Choose from 6 IRA account options, with access to stocks, ETFs , futures, currencies and more.
Acorns Later
Finder Score: 4.2 / 5: ★★★★★
Acorns Later
$0
$3 per month
Roth, Traditional, SEP
Automatic ETF investing with as little as $5. Annual fee of $3, $5 or $9 per month depending on subscription.
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Bottom line

A rollover IRA lets you transfer money from an old employer-sponsored retirement plan such as a 401(k), 403(b) or 457(b) to an IRA without taxes or penalties. This can be a good idea if you want more flexible investment options or to consolidate your retirement money in one account after leaving a job. But stick with an IRA of the same tax structure to avoid paying taxes on the rollover.

Not all IRA providers accept rollover contributions, so compare the best Roth IRA accounts and the best IRA accounts to see which provider offers rollover IRAs and the services you’re interested in.

Frequently asked questions

What is a rollover IRA?

A rollover IRA is the process of moving an old employer-sponsored retirement plan, such as a 401(k), to an IRA and maintaining the account’s tax-deferred status.

Are rollover IRAs a good idea?

A rollover IRA may be a good option if you’ve left your employer and want to manage all your retirement money in one place. A rollover IRA might also be a good option if you want more flexibility in terms of investment options.

How do I roll over my IRA without penalty?

A direct rollover, where your old retirement plan issues the payment directly to your rollover IRA provider, is the best way to roll over funds to an IRA without penalty.

Which is better: traditional IRA or rollover IRA?

A rollover IRA can be structured as a traditional IRA, where the account is funded with pre-tax dollars.

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