An employer-sponsored investment account can be highly beneficial, but what happens if you take a job elsewhere or your company closes? Or, what if you want to use your retirement funds to invest in other opportunities, like those often available from a trusted self-directed IRA custodian

Rollover IRAs make it easy to transfer money from an employer-sponsored retirement plan to an IRA account that you can use as you see fit (and under IRS requirements).

It will also allow you to move your money without losing the tax advantage that makes many retirement accounts so attractive to investors. 

Here’s what you need to know about a rollover IRA. 

What Is a Rollover IRA?

A rollover IRA is a retirement investment account that investors use to move money from a qualified employer-sponsored retirement plan while maintaining the account’s taxed deferred status.

Rollover IRAs are most frequently used by employees with a qualified account, like a 401(k), 403(k), or a SIMPLE plan, and who wish to move those funds into a personal retirement account not tied to their employer.

One of the most common reasons to choose rollover IRAs is to preserve your retirement savings after leaving a company that offers a qualified retirement plan.

If you leave the company, you can no longer leverage your employer’s retirement plan. Instead, you must move or “rollover” that money into a new account. 

Leaving a job isn’t the only reason someone may want to open a rollover IRA account. For some investors, switching to an IRA opens up additional investment opportunities not available through the employer-sponsored investment plan. 

Is a Rollover IRA a Traditional IRA?

Yes, a rollover IRA is a traditional one funded by transferring money from a qualified employer-sponsored retirement account to the rollover account.  

Once opened, a rollover IRA operates as a traditional IRA and is subject to the same IRS rules and regulations. For instance, funds maintain their pre-tax advantage and will be taxed upon withdrawal based on your income rates.

Similarly, both have rules about when you can withdraw without penalty (59 ½ or later) and when you need to take distributions (72 years of age). 

Rollover IRAs also have the same contribution limits, with one exception. A rollover IRA does not have an initial contribution limit, meaning there’s no limit on how much money you can roll into the account during the first transfer.

However, once the account is initially funded, it will be held to the same IRS-based contribution limit as a traditional IRA: $6,000 a year ($7,000 if you’re 50 years of age or older). 

Can I Roll Over a 401k to a Roth IRA?

Yes, you can move 401k funds to a Roth IRA, but the process is a bit different depending on the type of 401(k) you have.  

If you have a Roth 401(k), you can roll your fund directly into the Roth IRA without worrying about immediate tax implications. 

If you have a traditional 401(k), then it’s important to note that you will need to pay income tax on the amount rolled into the new Roth IRA. That’s because traditional IRAs are funded using pre-tax dollars, while Roth IRAs are funded using taxed income. 

Can I roll my 401l into a self-directed IRA account?

Yes, it is possible to roll 401(k) funds into a self-directed account. You can do so with a direct rollover, moving your funds directly from one trustee or custodian to another.

You can also choose an indirect rollover, where you withdraw and take possession of your funds and then deposit them into the new account. 

Learn more about Self-directed Rollovers, or you can choose an indirect IRA.  

Consult with Horizon Trust

Can I Add Money to My IRA Later? 

Yes, you can add money to your rollover IRA account later. However, like traditional IRA contributions, rollover IRA contributions are subject to IRS contributions and required minimum distribution limits.

As of 2024, the IRA contribution limit is $7,000 annually, but if you are 50 years old or older, you can contribute an additional $1,000, lifting the contribution limit to $8,000 annually. 

Is a Rollover IRA a Good Idea?

If you have a qualified employer-sponsored retirement account and will be leaving the company, then a rollover IRA is a good way to manage your funds.

Another reason you may want to consider a rollover IRA is if you are leaving your employer and want to use your retirement funds for alternative investments, such as cryptocurrency, real estate, or notes. If that’s the case, you can choose a self-directed rollover IRA. 

Still, investment decisions are highly personal, so you should always speak with a financial professional to determine if a rollover IRA is the best option for you. 

Will I Owe Taxes on My Rollover IRA?

If you’re moving funds from a traditional 401(k) or other qualifying retirement accounts, you will not immediately owe taxes. However, because rollover IRAs operate as traditional IRAs, you will be responsible for paying income taxes when you withdraw funds or take distributions. 

If you plan to roll your qualified retirement account into a Roth IRA, then you will need to pay income taxes at the time of the rollover. That’s because Roth IRAs are funded with post-tax dollars, whereas traditional IRAs are funded with pre-taxed dollars. 

How Do I Know If I’m Eligible for a Rollover?

Rollover eligibility can vary by plan but typically depends on a distributable event. Distributable events include:

  • Leaving your employer for a new position
  • A job termination or layoff
  • Death
  • Disability
  • Reaching the age of 59 ½ 

If you’re not sure you’re eligible, contact your account custodian. 

Is an IRA Safer than a 401K?

The safest retirement account for you depends on your unique situation; however, there are some considerations to remember. 

IRAs generally offer more investment options. As such, you can create a robust portfolio that includes a variety of investment vehicles. Doing so may be able to help you weather volatile markets.  

On the other hand, 401(k)s are often protected from creditors, meaning they can’t seize the funds in the account, nor can they garnish those funds. Unfortunately, IRA funds are not protected from creditors except in the event of bankruptcy. 

If you’re not sure if an IRA is the safest option for you, speak with an expert who can help you evaluate your financial situation and choose a retirement account that meets your needs. 

Rollover IRAs are a great way to move funds from a qualified employer-sponsored retirement plan if you are leaving your employer and need to move your retirement funds. They offer an easy way to transfer funds and often help you maintain the tax advantage of your previous account.  

If you’re considering rolling your qualified retirement plan funds into an IRA, contact Horizon Trust. We can guide you through the self-directed IRA rollover so that you can start investing as soon as possible.