Got a workplace retirement account from a former employer? There are 4 options for such a 401(k): Keep it with your former employer's plan, roll over the money into an IRA, roll over into a new employer's plan (including plans for self-employed and small businesses), or cash out. It's up to you to decide which option is best for you, but here’s what you need to know about rolling over the money to an individual retirement account (IRA). What’s the difference between a rollover IRA vs. a traditional IRA? Here’s what you need to know.
What is a rollover IRA?
A rollover IRA is a retirement account that allows you to move money from your former employer-sponsored plan to an IRA—tax- and penalty-free1—while keeping your money's tax-deferred status. As with workplace plans, you won’t be taxed on your investments and potential growth within a rollover IRA until you make withdrawals, and you can continue to make contributions to the account. Unlike workplace plans, you (not your employer) choose where you open an IRA, so you’re able to ensure that your IRA provider has the investment offerings, fees (investment-related or transaction-related fees), and ways to access your money that you want.
What is a traditional IRA?
A traditional IRA is an individual retirement account designed to help people save for retirement, with taxes deferred on any potential investment growth. Contributions to a traditional IRA are generally made with after-tax dollars and may be tax-deductible, depending on your income, and if you are participating in an employer-sponsored plan.2 This may help reduce your tax bill for the year. Any earnings in a traditional IRA would still grow tax-deferred, meaning you wouldn’t pay taxes on potential earnings until you withdraw the money.3 When you do withdraw, you'll owe ordinary income tax. Many retirees find themselves in a lower tax bracket than they were pre-retirement, potentially making it advantageous to contribute during working years when you may be subject to a higher tax rate and paying tax on withdrawals in retirement.
Is a rollover IRA the same as a traditional IRA?
Essentially, traditional and rollover IRAs are both treated as traditional IRAs for tax purposes. The main difference is that a rollover IRA is typically used to keep assets contributed to an employer-sponsored retirement plan like a 401(k) separate from personal contributions to an IRA.
You may choose to roll over workplace retirement savings to a traditional IRA, but you don’t have to. You could instead move the funds into a Roth IRA, another flavor of retirement account. As we'll see, there may be tax implications to this move.
Rollover IRA vs. traditional IRA
Even though a rollover IRA could function like a traditional IRA, there are some differences between them that are worth understanding.
| Rollover IRA | Traditional IRA | |
| Eligibility | Anyone with an existing retirement plan, except when rolling over an after-tax workplace account | Anyone with qualified income who plans on making contributions. |
| Annual contribution limits (2024 and 2025) | $7,000 ($8,000 if over 50) (not including the amount rolled over from another plan) | $7,000 ($8,000 if over 50) |
| Taxes on contributions | No initial taxes are withheld if you do a direct rollover. Rollovers are not tax-deductible. You may be eligible to deduct up to the full amount you contribute if your income is under the IRS limits for subsequent contributions. | You may be eligible to deduct up to the full amount you contribute if your income is under the IRS limits. |
| Taxes on assets held within the account/withdrawn | Assets are tax-deferred while in the account. Original deductible contributions are subject to income tax at withdrawal. | Assets are tax-deferred while in the account. Original deductible contributions are subject to income tax at withdrawal. |
| Source of contributions | Employer-sponsored plan, potentially followed by personal contributions | Personal contributions |
Rollover IRA vs. Roth IRA
Unlike a traditional IRA, where contributions are tax-deferred, you make contributions to a Roth IRA with money you’ve already paid taxes on. Roth IRA contributions grow tax-deferred, with the potential for tax-free withdrawals in retirement, as long as certain conditions are met.
Most people are eligible to convert their 401(k) to a Roth IRA. However, you should be aware of the potential tax implications. If you have money in a Roth 401(k)—which some but not all employers offer—or after-tax contributions, you may be able to roll contribution dollars directly into a Roth IRA without incurring any taxes.4 However, if the 401(k) funds are pre-tax or mostly attributable to earnings on the Roth 401(k) contributions, then all or a part, of the assets converted to a Roth IRA will be a taxable event. The upside is, a conversion has the potential to help reduce future taxes and maximize retirement savings.
Here are some differences between rollover IRAs vs. Roth IRAs.
| Rollover IRA | Roth IRA | |
| Eligibility | Anyone with an existing retirement plan, except when rolling over an after-tax workplace account | Based on modified adjusted gross income (MAGI) |
| Annual contribution limits (2024 and 2025) | $7,000 ($8,000 if over 50) (not including the amount rolled over from another plan) | Up to $7,000 ($8,000 if over 50) (not including the amount rolled over from another plan, which must be a Roth 401(K) or after-tax dollars) |
| Taxes on contributions | No initial taxes are withheld if you do a direct rollover. Rollovers are not tax-deductible. You may be eligible to deduct up to the full amount you contribute if your income is under the IRS limits for subsequent contributions. | Contributions are made with after-tax money. Contribution amounts can be withdrawn anytime, tax- and penalty free. Withdrawals in retirement that include earnings from the account may be tax-free as well, if certain conditions are met. |
| Taxes on assets held within the account/withdrawn | Assets are tax-deferred while in the account. Original deductible contributions are subject to income tax upon withdrawal. | Potential asset growth is tax-free while in the account. Qualified withdrawals may also be tax-free. |
| Source of contributions | Employer-sponsored plan, potentially followed by personal contributions | Personal contributions |
Deciding between a rollover IRA vs. traditional IRA
A rollover IRA is an option for employees who are rolling over their employer-sponsored workplace plan to an individual retirement plan. If you don’t have funds to roll over from a different retirement plan, you could open a traditional IRA and make personal contributions not connected to an employer-sponsored account.
How to open a rollover IRA
1. Choose a financial services provider where you want to hold your rollover IRA.
Research their investment options, fees, and ease of use of their website and/or app. (Psst … Fidelity offers rollover IRAs with no minimums or account fees.5)
2. Decide whether you want to keep your 401(k) with your old employer’s plan, roll it over to your new employer’s plan, roll it over to an IRA, or accept a distribution from your workplace plan.
With a direct rollover, your former workplace retirement plan administrator sends your rollover directly to the IRA provider you’ve selected. This may provide the smoothest experience. If you choose to get a check for your workplace retirement plan instead, you have 60 days from when you receive the distribution to transition your account to a new rollover IRA without incurring withholding taxes.
3. Decide whether you want to select your own investments or have investments picked for you.
You can choose between managing your own investments—picking which securities to buy using your workplace plan distribution—or having a managed account in which an advisor or robo advisor makes those selections for you, based on information you share about your preferences.
4. Request the distribution from your workplace plan or contact a financial representative at the IRA company to initiate a direct rollover.
At Fidelity, you can open a rollover IRA online and be guided through the steps, including filling out a form. Have your Social Security number handy and other contact details handy.
Can I contribute to a rollover IRA?
Yes, you can contribute after you complete your rollover from an employer-sponsored plan. Before making a contribution to a rollover IRA, consider whether doing this may prevent you from rolling your savings into a new employer-sponsored plan down the road. In some cases, employers may not allow a new employee to roll their retirement savings into their plan if the savings have been combined with direct contributions to the employee's IRA.
How to open a traditional IRA or Roth IRA
1. Choose a financial services provider where you want to house your traditional IRA.
Look into the options they offer, fees they charge, and what their website and/or app are like. You can open a traditional IRA at Fidelity, and there are no minimums or account fees.6
2. Decide whether you want to select your own investments or have investments picked for you.
You can choose an account that allows you make your own investments or choose a managed account, in which an advisor makes selections for you.
3. Call the financial services provider or follow online steps to open the account.
They’ll need personal details like your contact information and Social Security number.
4. Fund the account and get the money invested.
You likely will need to link your IRA to a bank account so you can transfer money into your new account. Once your money arrives in the account, use it to buy investments, whether you DIY or work with an advisor.
