Rollover IRA
A Rollover IRA is a Traditional IRA that receives assets transferred from an employer-sponsored retirement plan such as a 401(k) or 403(b), typically when an employee leaves a job, allowing the funds to continue growing tax-deferred.
When an employee leaves a job — whether through resignation, layoff, or retirement — they generally have four options for their old 401(k) balance: leave it in the former employer's plan, roll it into the new employer's plan, roll it into an IRA, or cash it out. The Rollover IRA is frequently the most advantageous choice, offering broader investment options, potential cost savings, and consolidated account management.
A 'direct rollover' — where the plan distributes funds directly to the IRA custodian — is the cleanest approach. No taxes are withheld, and no deadline pressure exists. An 'indirect rollover' or '60-day rollover' means the plan sends a check to the participant, who then must deposit it into an IRA within 60 days to avoid the distribution being treated as taxable income plus the 10% early withdrawal penalty. When the plan issues an indirect distribution, it is required to withhold 20% for federal income tax — meaning the participant must make up that 20% from other funds to roll over the full balance.
The one-rollover-per-year rule limits IRA-to-IRA (indirect) rollovers: only one per 12-month period across all your IRAs combined. However, this rule does not apply to rollovers from employer plans into an IRA, or to Roth conversions. Plan-to-IRA rollovers are unlimited.
Pre-tax 401(k) funds roll into a Traditional IRA with no tax due at rollover time. Roth 401(k) funds roll into a Roth IRA. After-tax basis (non-Roth) in a 401(k) can be rolled to a Roth IRA (triggering tax only on earnings, not the after-tax principal — a tax-efficient move). Inside the Rollover IRA, the investor gains access to the full universe of investments available through the custodian: individual stocks, bonds, ETFs, mutual funds, REITs, and more — far beyond the typical 20-30 fund menu of most 401(k) plans. Some financial advisors charge to manage Rollover IRAs; low-cost self-directed options at major custodians are widely available.