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Rollover IRA

An IRA opened to receive money moved out of a workplace retirement plan such as a 401(k), usually after leaving a job.

What It Means

A rollover IRATraditional IRAAn individual retirement account where contributions may be tax-deductible, growth is tax-deferred, and withdrawals are taxed as income. See more is an individual retirement account opened to receive money moved out of a workplace plan, such as a 401(k)401(k)A retirement plan run through an employer that lets you put part of each paycheck into investments, before tax or as Roth, up to a yearly IRS limit. See more from a job you've left. Moved correctly, the money keeps its tax-deferred status and nothing is taxed. The move can go straight from the plan to the IRA (a direct rollover), or the plan can pay you and you deposit the money yourself within 60 days (an indirect rollover), which brings withholding and deadlines with it.

Try It: See What a Check Rollover Leaves Taxable

A plan pays you by check instead of moving the money directly. It must withhold 20%. Slide to add your own savings to the deposit.

Check you receive$40,000
Deposited within 60 days$40,000
Left out, treated as a withdrawal$10,000

That amount is taxed as income, and before age 59½ it may also owe the 10% additional tax.

A direct rollover skips all of this: nothing is withheld.

How People Say It

  • "I rolled my old 401(k) into an IRA."
  • "Ask them to send it straight to the new account."
  • "They withheld 20% and I didn't know I had to make it up."

The Breakdown

The family. Keisha, 41, left a job with $50,000 in its 401(k). She opened a rollover IRA, and the old plan mailed her a check for $40,000, having withheld $1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more,000 as the IRS requires when a plan pays you directly.

Where it went wrong. Keisha deposited the $40,000 within 60 days and thought she was done. The IRS treats the $10,000 she didn't replace as a withdrawal: it's taxed as income, and because she's under 59½ it can owe the 10% additional taxEarly withdrawal penaltyThe IRS 10% additional tax on money taken from a 401(k), IRA or similar account before age 59½, unless an exception applies. See more too. That withheld $10,000 does count toward her tax bill when she files, but it no longer sits in a retirement account.

Direct rolloverCheck paid to Keisha
Withheld$0$10,000
Reaches the IRA$50,000$40,000, unless she adds $10,000 of her own
DeadlineNone for her60 days
Taxable if not replaced$0$10,000

What to watch for

  • Ask the old plan for a direct rollover, paid to the new IRA, so nothing is withheld.
  • If you do get a check, deposit the full original balance within 60 days, using other savings to replace the 20%.
  • Moving money from one IRA to another by check is limited to one rollover in any 12-month period, a rule the IRS says it can't waive.
  • Keep Roth 401(k)Roth 401(k)The Roth option inside a 401(k): you contribute after tax, and qualified withdrawals, earnings included, come out tax-free. See more money in a Roth IRARoth IRAAn individual retirement account funded with after-tax money, where qualified withdrawals, earnings included, come out tax-free. See more and traditional money in a traditional IRA, so each keeps its tax treatment.

Good to Know

According to the IRS, you have 60 days from the day you receive a distribution to roll it over, and the IRS may waive that deadline when you missed it because of circumstances beyond your control. It can't waive the one-rollover-per-year rule for IRA-to-IRA rollovers. The IRS rollovers page lists which kinds of distributions can and can't be rolled over, and a tax professional can check a rollover that has already gone wrong.

FAQ

How long do I have to complete a rollover?

60 days from the day you receive the money, according to the IRS. A direct rollover, where the plan pays the new account, has no deadline for you to meet because the money never passes through your hands.

Why did my old 401(k) withhold 20%?

The IRS requires 20% withholding when a plan pays a distribution to you, even if you plan to roll it over. A direct rollover to an IRA or another plan isn't subject to that withholding.

Is a rollover IRA different from a traditional IRA?

It works the same way: it's an IRA that happens to hold money from a workplace plan. Many people keep it as its own account so the old plan's money is easy to track.

Do It in Buhata

Accounts

Add the rollover IRA in Accounts on the day the money lands, and set a Reminder 50 days after any check arrives so the 60-day deadline can't slip past.

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Related Terms and Categories

  • 401(k)

    A retirement plan run through an employer that lets you put part of each paycheck into investments, before tax or as Roth, up to a yearly IRS limit.

  • Traditional IRA

    An individual retirement account where contributions may be tax-deductible, growth is tax-deferred, and withdrawals are taxed as income.

  • Early withdrawal penalty

    The IRS 10% additional tax on money taken from a 401(k), IRA or similar account before age 59½, unless an exception applies.

  • Vesting

    How much of the money an employer puts in your retirement plan is yours to keep, which usually grows with your years of service.

  • Roth IRA

    An individual retirement account funded with after-tax money, where qualified withdrawals, earnings included, come out tax-free.

Saving and investing basics

Sources

Internal Revenue Service, "Rollovers of retirement plan and IRA distributions"; IRS, "Topic no. 413, Rollovers from retirement plans"; IRS, "Retirement plans FAQs relating to waivers of the 60-day rollover requirement"; IRS, "Topic no. 558, Additional tax on early distributions from retirement plans other than IRAs"

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