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What Is a Rollover IRA?

If you’re looking to change careers, you may have questions about what you can, or should, do with your existing 401(k). Withdrawing all the money today will trigger tax obligations, and owing taxes is never fun, so a rollover IRA will be recommended in this scenario.

There are financial vehicles that can help shelter this money from triggering a tax obligation, and you can even avoid paying the withdrawal penalty. This is where a rollover IRA can be extremely helpful. 

Rollover IRA Explained

Before understanding how a rollover IRA works, let’s take a step back and first explain what a rollover IRA, or individual retirement account is. 

Simply put, a rollover IRA is a type of investment account that allows one to move their funds from a previously sponsored employment retirement plan to an IRA. By doing so, the account holder can defer paying taxes, and can avoid paying the withdrawal penalty their previous retirement plan would have. 

Rollover IRA’s are a common option for those with a 401(k), ROTH 401(K), 457 plans, and 403(b)

How Does a Rollover IRA Work?

A rollover IRA allows you to consolidate previous employer retirement accounts into one central location. Similar to an employer sponsored retirement plan, a rollover IRA grows tax deferred, which means you do not pay taxes until you start withdrawing money at the legal age of retirement. 

How Is a Rollover IRA Taxed?

Generally speaking, if you roll 100% of your assets from an employer sponsored retirement plan to a rollover IRA, you can avoid paying taxes. However, if you do not roll 100% of the account over, you will be stuck paying tax on whatever percentage you kept. 

Is a Rollover IRA the Same as a Traditional IRA?

A rollover IRA can be a traditional IRA. However, one of the added features on a rollover IRA is that there is no restriction on how much money you can deposit when you go with a rollover IRA option. 

Can You Take Money Out of a Rollover IRA?

You certainly can take money out of a rollover IRA, but it may not be in your best interest. Unless you have a qualifying circumstance, you’ll pay income taxes and even a penalty to the IRS if you withdraw money before you are 59 ½ years old. 

How Many Times Can You Rollover an IRA?

You can complete one rollover every twelve months. 

Rollover IRA Rules

There are various rules you’ll have to follow with a rollover IRA. For instance, if you are planning on rolling over 100% of your previous employer sponsored retirement plan, you’ll have 60 days to do so.

If not, you can face taxes and fines. Additionally, as mentioned above, the Internal Revenue Services, or IRS, allows one rollover per year. 

Advantages of Rollover IRA

Rollover IRA’s provide numerous advantages. These advantages include:

  • It can keep all of your retirement accounts from previous employers under one umbrella. Instead of managing various brokerage accounts, all of your accounts can live under one umbrella which will save you a ton of time and frustration. 
  • A rollover IRA opens the door to more investment choices. Instead of being obligated to select from a few mutual funds and bond funds, a rollover IRA will open the door to more stocks, bonds, and even exchange traded funds
  • Lower fees. Everyone has different fees for their retirement plan, but it’s very likely a rollover IRA will be less expensive to manage than perhaps your company’s 401(k). 
  • More control. In most instances, if you were to pass away your 401(k) would be paid in one lump sum to your beneficiary. An individual retirement account has more payout options, providing the account holder, and beneficiaries, with more control. 

Disadvantages of Rollover IRA

Understandably, there are also disadvantages that come with a rollover IRA. These include:

  • There are no loan options for individual retirement accounts. If you need to borrow money, and you are not 59 ½ years old, you’re paying taxes and fees on that borrowed money. 
  • Some individual retirement account investments could come with additional fees, such as commissions and trading fees on specific investment vehicles. 
  • There are no penalty-free withdrawals available prior to age 59 ½. 

Best Rollover IRAs

If you’re interested in moving your money into an IRA, here is a list of some of the best companies/options available to you. 

Fidelity 

Fidelity Investments is well known and respected. This firm comes with plenty of no-transaction fee mutual fund options, and investors can avoid paying fees for many other investments, including when trading stocks

Best For: Fidelity is well known for retirement planning, and offers a wide range of tools that can help you lay out your retirement goals. Once the goals are established, you can ‘track your progress’ to ensure you are staying on the right path. 

Benefits:

  • A wide range of no-transaction fee mutual fund options.
  • Fidelity offers their own fund choices with no expense ratio.
  • Plenty of retirement planning tools. 

Disadvantages:

  • You can expect to pay a higher fee if you use their representative-assigned trades. 
  • The platform is streamlined, but not as technical as some of its competitors. If you’re an advanced investor or trader, you may find the platform to be a bit basic. 

Pricing: Additionally, this option is affordable. There is no account minimum balance or monthly account fees. 

Rating: Overall, Fidelity receives a 9 out of 10 star rating. 

Charles Schwab 

Charles Schwab has been around since 1971 and is a great investment platform. 

Best For: This is a universal option that is appealing for both new and active investors. 

Benefits:

  • The mobile platform, which receives above average ratings. 
  • A long list of no fee mutual funds. 
  • There is a $0 account minimum, and $0 commission for stock, options and ETFs. 

Disadvantages:

  • You can only trade investments in the U.S. or Canadian markets.
  • Despite providing a list of no fee mutual funds, there are some mutual funds that have an overpriced trading fee.

Pricing: Overall, it’s easy to set up an account and affordable. There is no account minimum fee. The fees tend to be in the investors favor. 

Rating: All in all, Charles Schwab Receives a 7 out of 10 star rating. 

TD Ameritrade 

This option is an excellent brokerage that offers a wide range of trading platforms and investment vehicles. 

Best For: TD Ameritrade is universal. Beginners love the overall experience as there are countless hours of educational videos/classes.

Advanced traders and investors appreciate how robust the platform is and the various tools they can use to help analyze investments. 

Benefits:

  • No account fees. 
  • $0 in fees to trade stocks. 
  • They offer 4 different investment platforms, and an absolutely fantastic mobile app. 
  • There is a library filled with educational videos/classes and certifications. 
  • Outstanding customer service, and in person locations to visit. 

Disadvantages:

  • $75 for transfers. 
  • TD Ameritrade does not offer fractional shares trading options. 

Pricing: All in all, this is an affordable option. You can invest in countless stocks, ETFs, mutual funds and options. It’s $0 to trade stocks if you execute your own trade. 

Rating: All in all, TD Ameritrade receives 9 out of 10 stars. 

Merrill Edge

Merrill Edge is owned by Bank of America, and has been gaining popularity in recent years. If you’re looking for a more ‘hands off’ brokerage, Merrill Edge may be best suited for you.

Best For: Merrill Edge is certainly created for the more long-term investor. 

Benefits:

  • If you are a Bank of America customer, Merrill Edge integrates seamlessly with your banking accounts. 
  • They have extensive third-party research.

Disadvantages:

  • Their platform is rather basic. If you’re an advanced trader or investor, you may find certain tools are lacking.
  • There are fewer securities or investment vehicles one could invest in or trade. 

Pricing: There is a $0 account minimum requirement and it doesn’t cost anything to trade stocks. Options have a $0.65 per contract fee. 

Rating: All in all, Merrill Edge receives 6 out of 10 stars. 

E*Trade

E*Trade was founded in 1982, and is a subsidiary of Morgan Stanley. This electronic brokerage has grown to millions of users across the nation in the present day. 

Best For: E*Trade is a fantastic online trading platform that caters to many different investor types and experiences. Both the beginner and advanced investor can appreciate what E Trade has to offer. 

Benefits:

  • No minimum balance requirement.
  • Plenty of commission free stock and ETF options to trade.
  • Over 4000 mutual funds that you can invest in without paying a fee. 

Disadvantages:

  • It costs $19.99 to invest a mutual fund, unless it’s one of the few thousand that do not have a fee associated with it.
  • Their mobile platform is not nearly as sophisticated as some of their competitors. 

Pricing: Pricing is aligned with its competitors. In today’s age, it’s tough to get away with charging a fee to trade stocks. Investors will find plenty of no fee mutual fund options available for them, and there is no account minimum requirement. 

Rating: All in all, E*Trade receives 7 out of 10 stars. 

IRA vs 401(k)

A 401(k) is an employer sponsored investment option. Some employers will match a percentage of your income and contribute to your 401(k) plan, however, a company match is not a requirement. 

401(k)s can be limiting with their investment choices. You may not be able to invest in the mutual fund or stock portfolio you’d prefer to invest in. That is one of the reasons why an IRA may be right for you. 

If you’ve left an employer and have an outstanding retirement account in limbo, it likely makes sense to move that account into a rollover IRA. This will pave the way to consolidating all your investments, and will help bring more visibility into your investing performance. 

Act Early, Reap the Benefits 

Investment vehicles, such as a rollover IRA, traditional IRA, or 401(k), are important tools to help you prepare for your retirement. Even if you’re young, you should be thinking about your long term future.

The earlier you get a jump start on this investing, the more money you could have in your retirement years! Even though retirement may not be for 20 or 30 years, start thinking about how you will prepare for retirement, today!

Working with a financial advisor is a sure way to make sure you’re on the right path. Financial advisors can help you consolidate numerous retirement accounts, can help roll your money into a rollover IRA, and will assist you navigating the complexities of taxes and investing.