Rollover IRA

AAA

DEFINITION of 'Rollover IRA'

A special type of traditional individual retirement account into which employees can transfer assets from their former employer’s retirement plan when they change jobs or retire. The purpose of a rollover IRA is to maintain the tax-deferred status of those assets. Rollover IRAs are commonly used to hold 401(k), 403(b) or profit-sharing plan assets. Rollover IRA funds can later be moved to a new employer's retirement plan. Rollover IRAs do not cap the amount of money an employee can roll over, and they permit account holders to invest in a wide array of assets such as stocks, bonds, ETFs and mutual funds.

BREAKING DOWN 'Rollover IRA'


By moving retirement plan assets through a direct rollover, in which the former employer’s plan administrator moves the assets directly to the rollover IRA, employees avoid having 20% of their transferred assets withheld by the IRS. Assets can also be moved using an indirect rollover, in which the employee takes possession of the plan assets and then places them into another eligible retirement plan within 60 days. With an indirect rollover, however, 20% of the account’s assets may be withheld and cannot be recovered until the employee files his or her annual tax return. If the movement of assets from a qualified employer-sponsored retirement plan to a rollover IRA is not handled correctly, the employee will face taxes. If he has not yet reached retirement age (59.5), he will also pay early withdrawal penalties on those assets.
 
An alternative to rolling distributions into a rollover IRA is for the employee to roll them directly into a new retirement account with a new employer. Other options include rolling assets into a traditional IRA, but this may have implications for transferring the funds to another employer’s retirement account in the future. The rollover money can also be converted into a Roth IRA, but taxes will be due since qualified employer retirement plan contributions are made pre-tax and Roth IRAs can only hold post-tax contributions.
RELATED TERMS
  1. IRA Transfer

    The transfer of funds from an Individual Retirement Account (IRA) ...
  2. IRA Plan

    A plan that individuals may establish to arrange and plan for ...
  3. Roth IRA

    An individual retirement plan that bears many similarities to ...
  4. Extended IRA

    An IRA that allows a second generation beneficiary to continue ...
  5. Revoked IRA

    An IRA holder may revoke an IRA within the 7 days after the IRA ...
  6. Roth IRA Conversion

    A reportable movement of assets from a Traditional, SEP or SIMPLE ...
Related Articles
  1. Taxes

    Tax Treatment Of Roth IRA Distributions

    Learn the requirements for withdrawing funds tax and penalty free.
  2. Taxes

    Tax Treatment Of Ineligible IRA Rollovers

    Eager to save for retirement? Learn how to avoid overpayment penalties.
  3. Taxes

    IRA Contributions: Deductions and Tax Credits

    We outline the incentives and help you take full advantage of the benefits.
  4. Taxes

    9 Penalty-Free IRA Withdrawals

    If you need to take early distributions, find out which exemptions allow you to avoid expensive consequences.
  5. Retirement

    SIMPLE IRA Vs SIMPLE 401(k) Plans

    See the differences that may cause an employer to choose one plan over the other.
  6. Taxes

    An Introduction To Correcting Ineligible IRA Contributions

    Eager to save for retirement? Find out how to avoid overpayment penalties.
  7. Taxes

    IRA Contributions: Eligibility And Deadlines

    Use this checklist for contribution requirements to make your payments on time.
  8. Taxes

    Analyzing IRA And ESA Statements

    Learn how to read and verify 5498 and 5498-ESA reporting your retirement-account contributions.
  9. Retirement

    Roth Vs. Traditional IRA: Which Is Right For You?

    To answer this question, you need to consider several of the factors we outline here.
  10. Taxes

    Deducting Losses On Your IRA Investments

    In regular accounts in which taxes are not deferred, losses on investments can be included on your tax return. Find out how.
RELATED FAQS
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  3. Can you buy penny stocks in an IRA?

    It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
  4. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
  5. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  6. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  2. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  3. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  4. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  5. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
  6. Wedding Warrant

    A warrant that can only be exercised if the host asset, typically a bond or preferred stock, is surrendered. Until the call ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!