An IRA rollover is the choice of taking money from your employer’s tax-deferred retirement plan, such as a 401(k) or 403(b), and reinvesting it into a personal individual retirement arrangement (IRA).
Typically this happens soon after retiring. It also can happen between jobs, especially if the new employer doesn’t offer a 401(k) or if the plan is unattractive.
Sometimes, the terms “traditional” and “rollover” IRA are useful interchangeably, which can be confusing.
Both are IRAs. The only difference is the source of the savings being invested.
A traditional IRA is funded by cash contributions by the saver. A rollover IRA is funded by moving existing savings from an employer-run plan after you leave a job.
If you already own a traditional IRA you can always choose to roll your workplace savings into that account. You do not need to open a new IRA to do a rollover.
For many savers it can be beneficial to “roll over” old retirement plans to an IRA.
For one, you gain more control over the investment options. Many employer plans by design are limited in their investment choices.
If your employer plan offers a low-cost, self-directed brokerage account, however, it may be beneficial to stay. These are rare, however.
A caveat: If you leave your employer after age 55, most workplace plans will allow for penalty-free withdrawals. If not, the penalty period on withdrawals ends at age 59 1/2 on funds moved into an IRA.
Look for a low-cost brokerage firm that offers low ongoing costs versus one that offers one-time perks, such as free money or free trades.
A good brokerage will provide a large selection of commission-free exchange-traded funds (ETFs) and index funds.
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