What Is an IRA Rollover?

Over the course of your career, it’s not uncommon to accrue a variety of retirement accounts: 401(k)s from one or multiple employers, different IRA(s) and more. Having multiple accounts held by different companies (known as the custodians) can be a lot to track—from keeping an eye on fees to keeping funds diversified to match your risk tolerance.

If you are looking to simplify your retirement plan and accounts or even just looking for better investment options, an IRA rollover might be a good option for doing so.

Below, we’ll provide a high-level overview of both IRAs and 401(k)s. We’ll share what an IRA rollover is, why you might choose to pursue one and the challenges you should be aware of before kicking off the process.

What is an IRA?

An individual retirement account (IRA) is a self-directed investment account that allows you to save for retirement while getting tax benefits.

Unlike a 401(k), an IRA is not sponsored by an employer. Anyone who has earned income during the year can open and contribute to an IRA. How much you can contribute will depend on your age. In 2024, those younger than 50 can contribute up to $7,000 per year, and those 50 or older can contribute up to $8,000 per year. Contributions can be phased out or even eliminated based on income.

There are two types of IRAs: traditional (contributions are deductible; future withdrawals are taxable) and Roth (contributions are after-tax; future withdrawals are tax-free). Each offers different benefits.

What is a 401(k)?

Like an IRA, a 401(k) is a type of tax-advantaged investment account that you can use to save for retirement. Also like an IRA, a 401(k) can be either a traditional or a Roth account. The key differences between a 401(k) and an IRA lie in their eligibility requirements and contribution limits.

A 401(k) is sponsored by an employer, so you can contribute to a 401(k) only if your employer offers a plan (and you qualify for that plan). Many employers offer a company match, which can supercharge your ability to save.

A 401(k) also has a much higher contribution limit than an IRA. In 2024, employees younger than 50 can contribute up to $23,000 per year to a 401(k), while those 50 or older are eligible to contribute up to $30,500.

What is an IRA rollover?

An IRA rollover is a process for transferring funds—rolling them over—from one (or multiple) retirement accounts into a traditional IRA or a Roth IRA. The resulting account is sometimes also called a rollover IRA.

How does an IRA rollover work?

There are a few different ways you can complete a rollover, including:

• A direct rollover. You can contact your plan administrator and have them move funds from one retirement account to another.

• A trustee-to-trustee transfer. If you are switching providers, you could ask your financial institution to make a payment to the new provider.

• 60-day rollover. Another option if you’re looking to move funds is to take a distribution directly to you and then deposit the funds into a new account within 60 days of the withdrawal.

Your financial advisor can help you determine which transfer method is best and help with the process.

What is the difference between an IRA and a rollover IRA?

An IRA and a rollover IRA are essentially the same thing, except a rollover IRA consists of funds that have been rolled over from an employer qualified retirement account or another IRA.

Which types of retirement accounts can be rolled over into an IRA?

What kinds of accounts you can roll over will depend entirely on the types of retirement accounts that you have. If you have multiple IRAs, for example, you might choose to roll them over into a single account. Or if you have a traditional IRA, you may want to convert it to a Roth IRA to change when and how the money is taxed.

Likewise, if you have one or multiple 401(k)s from previous employers, you might choose to roll those accounts over into a single IRA. This is very different from a 401(k) rollover, which involves rolling over a 401(k) from an old employer into a new 401(k) account at a new employer.

Here are different types of retirement accounts that could be rolled over into IRAs:

• 401(k), 403(b) and 457(b) employer-sponsored plans can be rolled over into either a traditional IRA or a Roth IRA.

• A SIMPLE (Savings Incentive Match Plan for Employees) 401(k) plan is a retirement account offered by companies with fewer than 100 employees. These accounts are eligible for both traditional and Roth IRA rollovers.

• A SIMPLE IRA is a retirement savings plan for small business owners and sole proprietorships. While you can roll over a SIMPLE IRA to a traditional or Roth IRA, there is a two-year waiting period.

• A designated Roth account is a separate account held within an employer’s 401(k), 403(b) or 457(b) plan that enables you to make contributions with after-tax money. A designated Roth is eligible only for a Roth IRA rollover.

• A traditional IRA can be rolled over to another traditional IRA. You could also convert any amount of your pretax money held in a traditional IRA to a Roth IRA (you will owe tax on the amount converted in the year you convert it).

• A SEP (Simplified Employee Pension) IRA is a retirement savings account used by small businesses and the self-employed. A SEP IRA is eligible for both traditional and Roth IRA rollovers.

• A solo 401(k) plan or one-participant 401(k) is a retirement savings vehicle for self-employed individuals, which can be rolled over into an IRA or Roth IRA.

• A spousal IRA enables a working spouse to make IRA contributions for their non-working spouse. These IRAs can be either a traditional or a Roth IRA. As with traditional IRAs, funds can be rolled over into either a traditional IRA or a Roth IRA. If it’s a spousal Roth IRA, it can only roll over to a Roth IRA.

Why are IRA rollovers a good idea?

There are many potential reasons to consider an IRA rollover. These are some of the most common:

IRAs can simplify your retirement plan

Consolidating multiple accounts into a single IRA makes it much easier to keep track of how you are progressing toward your retirement goals. It also makes it easier to understand the fees you are being charged and how your funds are diversified.

IRAs have more investment options

While a 401(k) can be an effective means of saving for retirement, you will often be limited in the types of investments that you can make through your account. Converting a 401(k) into an IRA can provide more options.

IRAs stay with you

When you leave an employer, many employers will allow you to leave your 401(k) behind in their custody. But some employers will not. In such a case, you will need to pursue either a 401(k) or an IRA rollover.

IRAs can be converted to Roth IRAs

An IRA rollover is one way to pursue a Roth conversion, which can reduce the tax impact on your savings down the road. Income tax is owed on the amount converted from a traditional to a Roth account.

IRAs have more flexible withdrawal rules

Though you generally need to wait until age 59½ to take money out of your IRA without paying an early withdrawal penalty, there are a few exceptions to this rule. The IRS will allow you to take penalty-free withdrawals from your IRA if you use funds for any of the following:

• A down payment on your first home

• Birth and/or adoption expenses

• Educational expenses

• Health insurance premiums if you’re unemployed for at least 12 weeks

• Expenses for a personal emergency

• Expenses resulting from a federally declared disaster

• To cover your expenses if you’re disabled

Is there a limit to how much you can roll over?

There is no limit on how much money you can roll into a rollover IRA, and a rollover will not count toward your annual contribution limit. There are, however, limits to how frequently you can pursue rollovers if you receive the funds a 60-day rollover. Generally speaking, you can do only one 60-day rollover during a 12-month period. There is no limit on the number of trustee-to-trustee or direct rollovers.

Do you get taxed on an IRA rollover?

How your IRA is taxed depends on what type of account you’re rolling from and what type of account you’re rolling into. But generally, you won’t have to pay taxes on the funds you move unless you’re moving traditional funds into a Roth account. If you are moving money into a Roth account, you’ll need to pay taxes on the transfer. But remember, you generally won’t pay taxes on that money later when you take it out.

What are the risks of rolling over an IRA?

If you leave your job, you could choose to keep your 401(k) savings in your employer’s plan or roll it over to an IRA. While there are many benefits to an IRA rollover, there are some benefits to keeping your money in your employer’s 401(k) plan. Here are a few risks of moving your money into an IRA versus keeping it in a 401(k):

You can’t borrow from your IRA

Some qualified plans—like a 401(k)—allow you to take a loan from your savings. However, an IRA is one fund the IRS does not allow you to borrow from.

IRA funds may not be protected

401(k) funds are protected from litigation or creditors. Your IRA assets may be protected, too—but it depends on what state you live in.

You may lose money in a divorce

Both types of retirement accounts are fair game when dividing assets. However, if the spouse receiving benefits accesses the funds before age 59½, that spouse may need to pay penalties on nonqualified funds in an IRA.

You won’t get to take advantage of the Rule of 55

The Rule of 55 allows you to access funds in an employer-sponsored retirement account without penalty if you retire or leave that employer after you turn 55. If you’re thinking about an early retirement, you may benefit from leaving some money in your 401(k).

Are rollover IRAs a good idea?

An IRA rollover is a decision that fits into your larger financial strategy. So, it’s important to understand how an IRA rollover might impact reaching your retirement goals, your tax bill and overall financial plan before you initiate the process.

Your financial advisor or a tax professional can help you weigh your options and evaluate the potential benefits that an IRA rollover can bring. Your advisor can also help you understand how your IRA can fit into your broader financial plan and find opportunities to help you grow and protect your money. By getting to know what’s important to you, your advisor can provide tailored recommendations to help you reach your goals with confidence.

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