What Is a Rollover IRA Account?

Even if you know a lot about financial planning and retirement savings and investing, the concept of a rollover IRA can be confusing.

In most respects, a rollover IRA is nothing more than a traditional IRA. A rollover IRA has the same rules, requirements, restrictions, and benefits as a regular IRA account does.

You cannot withdraw form a rollover IRA account without penalty until you turn age 59 1/2. Once you turn 70 1/2 you have to start taking required minimum distributions - RMDs - just like with a traditional IRA. Both IRAs offer full tax-deferral of all taxes on capital gains, interest and dividends as long as the money stays inside of the account.

How Does a Rollover IRA Differ From a Traditional IRA?

The one difference between a rollover IRA is either completely insignificant, or very important, depending upon what you plan to do with the funds inside your rollover IRA in the future.

Rollover IRAs are generally created as the result of a 401k rollover.

When someone does a rollover out of a 401k, 403b, or 457 plan they can roll those retirement dollars into a new IRA or an existing IRA account. If it is a new IRA, they can choose to designate that account as a normal traditional IRA, or as a rollover IRA. If it is an existing IRA account, then the money is characterized by whether or not the account is already a rollover IRA or not. It cannot be changed from a non-rollover IRA to a rollover IRA as part of the transfer.

The purpose of a rollover IRA is to segregate retirement funds that are eligible to be transferred back into a qualified retirement plan such as a 401k, from those that are not.

What Is a Rollover IRA For?

Money from certain kinds of retirement accounts can be transferred into a person's 401(k) plan. However, there are strict rules and conditions on what kind of money can be rolled into a 401k or other employer-sponsored retirement plan.

Transferring money from one 401k to another 401k is allowed.

Transferring money from a 401k to an IRA and then to a 401k is allowed if it has not been commingled with ineligible funds. That is the purpose of a rollover IRA.

Certain types of funds cannot be transferred into a 401(k) account. By designating an account as a rollover IRA and only transferring eligible dollars, such as those from other 401k plans, into the account the taxpayer creates a segregated account that can be transferred at some time in the future into a 401k plan.

If you plan to transfer your money into a 401(k) plan in the future, or if you are not sure whether or not you plan to, then a rollover IRA preserves that option. If you have no desire to move money back into a 401k at any future date, then there is no need to create a rollover IRA.

Note: There is no such thing as a rollover Roth IRA. All funds inside of a Roth IRA are ineligible to be transferred into a 401(k).

For more about 401k plans