What is a rollover IRA?

When you leave a job, you typically have four options for your 401(k) balance: leave it in your former employer's plan, roll it into your new employer's plan, roll it into an IRA, or cash it out. The IRS governs rollovers under Publication 590-A and rules around 401(k) plan distributions. A rollover IRA is simply a traditional IRA used to hold the funds you transferred from the old employer plan — it preserves the tax-deferred status of the money.

Direct rollover vs. indirect rollover: the critical difference

A direct rollover moves money from your old plan directly to the IRA. No taxes are withheld, no tax is owed, and there's no deadline pressure. This is the cleanest method. An indirect rollover means the plan sends you a check — for which they are required to withhold 20% for federal taxes. You then have 60 days to deposit the full original amount (including the withheld 20%, which you must cover from other funds) into an IRA. If you deposit only the 80% check, the withheld 20% is treated as a taxable distribution — and subject to the 10% early-withdrawal penalty if you're under 59½. The IRS 60-day rollover rule has limited waiver provisions but is strict by default.

• Direct rollover: Old plan → IRA directly. No taxes withheld. No deadline. Preferred method.
• Indirect rollover: Old plan sends you a check (minus 20% withholding). You have 60 days to deposit the full amount into an IRA. Miss the deadline = taxable event.
• You can only do one rollover from an IRA to another IRA per 12-month period (once-per-year IRA rollover rule). Direct trustee-to-trustee transfers are unlimited.
• 401(k)-to-IRA rollovers (from a qualified plan) do not count against the once-per-year limit.

Why roll over to an IRA instead of leaving funds in the old plan?

Main reasons people choose the rollover: (1) Broader investment choices — most 401(k) plans offer a limited menu; an IRA at a brokerage gives you access to nearly any publicly traded security. (2) Consolidation — rolling multiple old 401(k)s into one IRA simplifies management and RMD tracking. (3) Cost — if the old plan has high-expense-ratio funds, an IRA may enable lower-cost alternatives. Reasons to *not* roll over: some employer plans have institutional pricing (very low fees) that a retail IRA can't match; old employer 401(k)s may have better creditor protection in some states; and certain 401(k)s allow penalty-free withdrawals at age 55 (the 'Rule of 55') that IRAs do not.