Understanding Your Rollover IRA

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A rollover individual retirement account (IRA) is just like a regular brokerage account except that it is funded by transferring, or “rolling over," money from a previous employer's retirement plan.

With a rollover IRA, you're subject to the same terms as other retirement accounts (for instance, with certain exceptions, you can’t make a withdrawal before the age of 59 1/2 without paying a penalty). In other ways, though, it is far more flexible.

Key Takeaways

  • When you leave a job, you can cash out your 401(k), transfer it to a new one, or roll over the funds to an IRA.
  • An IRA rollover gives you investment freedom while still receiving the benefits of a tax-advantaged retirement plan.
  • You can only use an IRA rollover once per year, and you must be sure to complete it within 60 days to avoid tax consequences.

What to Do With Your 401(k) Funds When You Leave a Job

If your employer offers a company retirement plan such as a 401(k), and you wind up leaving the company, you have a few options for what to do with your retirement funds

Cash Out

You could cash out and take the money. However, there are two problems with that method. First, in addition to owing income tax on the money, you would likely incur large tax penalties from the IRS if you were to withdraw your funds before the age of 59 1/2. Secondly, doing so would negate the benefits of tax-deferred, compound growth of your investments. For instance, if you made $500 in dividends from stocks held in a 401(k) or similar retirement account, you likely won’t owe any taxes on that money for decades, as it continues to grow.

But if you instead hold the stock in a regular brokerage account, you'd get hit with taxes each year. One exception to early withdrawal penalties is if you elect to take Substantially Equal Periodic Payments (SEPP), also known as IRS Rule 72(t). SEPP requires you to continue withdrawals for five years or until you turn 59 1/2, whichever is longer.


If you receive the proceeds of your 401(k) to invest in a rollover IRA, it is very important that you complete the process within 60 days. If you miss this deadline, you will be subject to taxes.

Transfer to a New 401(k)

Another option is to move the money from your current employer’s plan to your new employer’s 401(k) plan. The transfer is relatively easy, and it keeps your assets consolidated, but you need to know that you will be limited to the choices offered by your new employer.

This can be a major drawback if you have certain stocks in mind, or if the plan options offered with your new job don't measure up to the ones you had under your old plan.

Open a Rollover IRA

Your third (and often best) option is to open a rollover IRA with a brokerage firm and have the funds from your old 401(k) moved into the account. This should be pretty simple to do. But you have to make sure that you follow all the right steps so you retain the tax benefits and don't get hit with surprise penalties.


You can use any type of IRA as a rollover IRA, so if you already have a Roth IRA or traditional IRA, you can use one of those or open a new one.

It's fairly straightforward to open a rollover IRA. There are many firms from which to choose. Some brokerage firms, such as Charles Schwab, have specialists who can execute your rollover to align with tax law as well as with your retirement goals. Other firms, such as TD Ameritrade, offer cash incentives.

What Are the Benefits of a Rollover IRA?

A rollover IRA lets you keep enjoying the tax shelter of a qualified retirement account. If you roll over your funds in the proper time frame, you won't be taxed as having taken a withdrawal from your old 401(k).


You have 60 days from when you receive the distribution from your old 401(k) to roll into an IRA, or you can arrange for a direct rollover or a trustee-to-trustee transfer. If you choose one of those methods, no taxes will be withheld from your account.

Also, you can exceed the typical IRA limits for this one event, because you'll be moving over the total amount of your 401(k). That may be much more than the yearly $6,000 limit.

Another perk of using an IRA: You'll enjoy much more freedom than you had with your old 401(k). You will be able to invest in nearly any stock, bond, mutual fund, real estate investment trust (REIT), or other security available through your broker. That means you can fine-tune your choices to work best for you.

Lastly, moving all of your retirement money into one place can give you a much clearer picture of where you stand. It can also help you better track your funds, find and reduce costly fees, and plan ahead.

What Are the Drawbacks of a Rollover IRA?

Although you do have the freedom to choose any of thousands of investment options with an IRA, so much choice can be overwhelming. You also might be tempted to trade often, which can result in friction costs and sub-par returns. Many of the assets you can buy may come with fees or sales loads, which can eat into your returns as well.

You can't borrow against your IRA like you can with a 401(k), and if you take money out before age 59 1/2, you may get hit with a penalty.

Lastly, you can only take advantage of the rollover IRA once each year, so you need to plan if you think you might need to use this feature more than that.

Frequently Asked Questions (FAQs)

How often can I use a rollover IRA?

Generally, you can roll over funds into an IRA once per year. You also can't roll funds from that IRA into a different account during that same one-year time frame. If you break this rule, the IRS will require the untaxed funds to be claimed as income, and you'll need to pay tax on them. You'll also have to pay the 10% penalty.

What can I do with a rollover IRA?

You can use your rollover IRA to invest in a variety of securities. Mutual funds, index funds, and exchange-traded funds are popular options for IRAs because they provide built-in diversification and are simple to buy. You can also benefit from the tax advantages of investing within an IRA, deferring taxes until you're ready to withdraw your funds in retirement.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "IRA FAQs - Distributions (Withdrawals)."

  2. IRS. "Rollovers of Retirement Plan and IRA Distributions."

  3. Charles Schwab. "Rollover IRA."

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