Table of Contents
- What Is a Rollover IRA?
- What Is a Traditional IRA?
- Is a Rollover IRA the Same as a Traditional IRA?
- Rollover IRA vs. Traditional IRA: A Side-by-Side Comparison
- Should You Roll Over to an IRA or Leave Your Money in an Employer Plan?
- Can You Contribute to a Rollover IRA?
- Can You Combine a Traditional IRA With a Rollover IRA?
- How to Open a Rollover or Traditional IRA
- FAQ
If you’re leaving a job, you may hear the term “rollover IRA.” But exactly what is a rollover IRA? Employees have the option of moving their retirement savings from their employer-sponsored 401(k) plan to an individual retirement account, or IRA, at another financial institution when they leave a job. This IRA, where they transfer their 401(k) savings to, is called a rollover IRA. If the 401(k) plan was not a Roth 401(k), you’ll likely want to open what’s called a traditional IRA.
In this scenario, a rollover IRA is also a traditional IRA. But they aren’t always the same. You can have a traditional IRA that is not a rollover IRA. Read on for the differences worth noting between a rollover IRA and a traditional IRA.
Key Points
- A rollover IRA is an individual retirement account created with funds rolled over from a qualified retirement plan, like a 401(k), usually when someone leaves a job.
- A traditional IRA is funded by direct contributions by the account holder, and contributions are tax-deductible up to a cap and subject to eligibility limitations.
- Directing rollover funds from an employer-sponsored plan to a traditional IRA that holds your direct contributions is called commingling funds, which you may not want to do, especially if you want to transfer the rollover funds to a new employer’s plan.
- Withdrawals from either a traditional IRA or a rollover IRA before age 59 ½ are subject to both income taxes and an early withdrawal penalty, aside from certain eligible exceptions.
- The IRS requires owners of both types of IRAs to start making withdrawals at age 73 (for people born in 1951 through 1959) or age 75 (for people born in 1960 or later); these withdrawals are also called required minimum distributions (RMDs).
What Is a Rollover IRA?
A rollover IRA is an individual retirement account created with money that’s being rolled over from a qualified retirement plan like a 401(k). Generally, rollover IRAs happen when someone leaves a job with an employer-sponsored plan, such as a 401(k) or 403(b), and they roll the assets from that plan into a rollover IRA.
In a rollover IRA, like a traditional IRA, your savings grow tax-deferred until you withdraw the money in retirement. And because you choose the provider rather than your employer, you can compare your options on investment selection, fees, and account access.
Moving the money through a direct rollover, where the funds go straight from your old plan to the IRA, keeps that tax-deferred status intact and avoids taxes and penalties.
What Is a Traditional IRA?
A traditional IRA is an individual retirement account that you can fund with your own contributions. If you or your spouse have taxable compensation for the year, you may be able to contribute up to the annual limit set by the IRS.
When you open a traditional IRA, your contributions may be tax deductible, depending on your income and whether you or your spouse is covered by a retirement plan at work.[1] Your savings then grow tax-deferred, which means you owe no tax on earnings while they stay in the account. You pay ordinary income tax on the money when you withdraw it in retirement.
This is advantageous to some retirees: Upon retirement, it’s likely one might be in a lower income tax bracket than when they were employed. Given that, the money they withdraw will be taxed at a lower rate than it would have when they contributed.
Is a Rollover IRA the Same as a Traditional IRA?
When it comes to a rollover IRA vs. traditional IRA, the only real difference is that the money in a rollover IRA was rolled over from an employer-sponsored retirement plan.
Otherwise, the accounts share the same tax rules on withdrawals, required minimum distributions, and conversions to Roth IRAs.
Recommended: Types of Retirement Plans and Which to Consider
Rollover IRA vs. Traditional IRA: A Side-by-Side Comparison
| Rollover IRA | Traditional IRA | |
|---|---|---|
| Source of contributions | Created by “rolling over” money from another account, most typically an employer-sponsored retirement plan, such as 401(k) or 403(b). For the rollover amount, annual contribution limits do not apply. | Created by regular contributions to the account, not in excess of the annual contribution limit, although rolled-over money can also be contributed to a traditional IRA. |
| Contribution limits | There is no limit on the funds you roll over from another account. If you’re contributing outside of a rollover, the limit is: • $7,500 for tax year 2026 plus an additional $1,100 if you’re 50 or older.[2] • $7,000 for tax year 2025 plus an additional $1,000 if you’re 50 or older. |
• Up to $7,500 for tax year 2026, plus an additional $1,100 if you’re 50 or older.[2] • Up to $7,000 for tax year 2025, plus an additional $1,000 if you’re 50 or older. |
| Withdrawal rules | Withdrawals before age 59 ½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home). | Withdrawals before age 59 ½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home). |
| Required minimum distributions (RMDs) | You’re required to withdraw a certain amount of money from this account each year once you reach age 73, or age 75 if you were born in 1960 or later[3] (thanks to the SECURE 2.0 Act of 2022). | You’re required to withdraw a certain amount of money from this account each year once you reach age 73, or age 75 if you were born in 1960 or later[3] (again, thanks to the SECURE 2.0 Act). |
| Taxes | Since contributions are from a pre-tax account, all withdrawals from this account in retirement will be taxed at ordinary income rates. | If contributions are tax deductible, all withdrawals from this account in retirement will be taxed at ordinary income rates. (If contributions were non-deductible, you’ll pay taxes on only the earnings in retirement.) |
| Convertible to a Roth IRA | Yes | Yes |
Should You Roll Over to an IRA or Leave Your Money in an Employer Plan?
Because a rollover IRA generally follows the same tax rules as a traditional IRA, the bigger decision is whether to move money from your old employer plan into an IRA or leave it in the plan.
Reasons to Roll Over Into an IRA
There are several advantages to rolling your employer-sponsored retirement plan into an IRA, vs. into a 401(k) with a new employer:
- IRAs may charge lower fees than 401(k) providers.
- IRAs may offer more investment options than an employer-sponsored retirement account.
- You may be able to consolidate several retirement accounts into one rollover IRA, simplifying management of your investments.
- IRAs offer the ability to withdraw money early for certain eligible expenses, such as purchasing your first home or paying for higher education. In these cases, while you’ll pay income taxes on the money you withdraw, you won’t owe any early withdrawal penalty.
Reasons to Leave Your Money Where It Is
There are also some rollover IRA rules that may feel like disadvantages to putting your money into an IRA instead of leaving it in an employer-sponsored plan:
- While you can borrow money from your 401(k) and pay it back over time, you cannot take a loan from an IRA account.
- Certain investments that were offered in your 401(k) plan may not be available in the IRA account.
- There may be negative tax implications to rolling over company stock.
- An IRA requires that you start taking required minimum distributions (RMDs) from the account at age 73, or age 75 if you were born in 1960 or later, even if you’re still working, whereas you may be able to delay your RMDs from an employer-sponsored account if you’re still working.
- The money in an employer plan is protected from creditors and judgments, whereas the money in an IRA may not be, depending on your state.
Recommended: 4 Step Guide to Retirement Planning
Can You Contribute to a Rollover IRA?
Yes, a rollover IRA can accept new contributions just like any other traditional IRA. You can make contributions to a rollover IRA, up to IRA contribution limits. For tax year 2026, you can contribute up to $7,500 (with an additional catch-up contribution of $1,100). If you do add money to your rollover IRA, however, you may not be able to roll the account into another employer’s retirement plan at a later date.
Can You Combine a Traditional IRA With a Rollover IRA?
A rollover IRA is essentially a traditional IRA that holds money rolled over from an employer-sponsored retirement plan. Because of this, you can generally combine a rollover IRA and a traditional IRA by moving the assets from one account into the other.
How you move the money matters. With an indirect, or 60-day, rollover, the money is paid to you and you generally have 60 days to deposit it into another eligible retirement account.[4] With a trustee-to-trustee transfer or direct rollover, the money moves directly between financial institutions, so it never passes through your hands and there’s no 60-day deadline to manage.
One catch applies when money from an employer-sponsored retirement plan is paid directly to you. The plan generally must withhold 20% for federal income taxes, even if you intend to roll over the full amount. To complete a full rollover, you would need to replace that 20% with money from another source within the 60-day period. Any taxable portion you don’t roll over generally counts as a distribution and, if you’re under age 59½, may also be subject to a 10% additional tax unless an exception applies.
There are a few other considerations when combining accounts. Mixing regular IRA contributions with rollover assets may make it more complicated to move those assets into a future employer-sponsored retirement plan, depending on the plan’s rules. Also, you generally can make only one 60-day rollover between IRAs in any 12-month period. That limit does not apply to trustee-to-trustee transfers, rollovers from an employer plan to an IRA, rollovers from an IRA to an employer plan, or conversions from a traditional IRA to a Roth IRA.
How to Open a Rollover or Traditional IRA
Opening a traditional IRA and a rollover IRA are identical processes — the only difference is the funding. You can open a traditional or rollover IRA by doing the following:
- Decide where to open your IRA. For instance, you can choose an online brokerage where you can choose your own investments, or you can select a robo-advisor that will offer automated suggestions based on your answers to a few basic investing questions. (There’s a small fee associated with most robo-advisors.)
- Open an account. From the provider’s website, select the type of IRA you’d like to open — traditional or rollover, in this case — and provide a few pieces of personal information. You’ll likely need to supply your date of birth, Social Security number, and contact and employment information.
- Fund the account. You can fund the account with a direct contribution via check or a transfer from your bank account, transferring money from another IRA, or rolling over the money from an employer-sponsored retirement plan. Contact your company plan administrator for information on how to do the latter.
The Takeaway
Both a rollover IRA and a traditional IRA allow investors to put money away for retirement in a tax-advantaged way, with very little difference between the two accounts.
One of the primary questions anyone considering a rollover IRA should consider is, will you keep contributing to it? If so, that would prevent you from rolling the rollover IRA back into an employer-sponsored retirement account in the future.
Whether it’s a rollover IRA you’ve created by rolling over an employer-sponsored retirement account or a traditional IRA you’ve opened with regular contributions, either account can play a key role in your retirement game plan.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
FAQ
Can you take money out of a rollover IRA?
Yes, but if you take money from a rollover IRA (or a traditional IRA for that matter) before age 59½, those withdrawals are subject to income tax and an early withdrawal penalty of 10%. There are certain exceptions, however. If you withdraw the money for certain higher education expenses or to buy your first home, for example, the penalty may not apply.
Why would you rollover an IRA?
A rollover is when you move money between two different types of retirement plans. Typically, you might roll over an IRA if you leave a job with an employer-sponsored plan, such as a 401(k) or 403(b). You would roll the assets from that plan into a rollover IRA where your savings grow tax-deferred until you withdraw the money in retirement.
You could instead choose to leave the money in your former employer’s plan, if that’s allowed, or roll it over into your new employer’s 401(k) or 403(b) plan, if they have one. However, a rollover IRA may offer you more investment choices and lower fees and costs than an employer-sponsored plan.
Can I roll over assets into my traditional IRA?
Yes, rolled over money can be contributed to a traditional IRA. It’s also worth noting that you can also combine a traditional IRA and a rollover IRA. You can do this with a direct transfer from one account to another, or by rolling money from one IRA to another, for instance. Just keep in mind that there is a limit of one rollover between IRAs in any 12-month period.
About the author
Kate Ashford
Kate Ashford is a freelance journalist who writes about personal finance, work and consumer trends. She has written for BBC, Forbes, LearnVest, Money, Real Simple and Parents, among others. Read full bio.
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