Rollover IRA
An individual retirement account funded by transferring assets from a former employer's 401(k) or another qualified retirement plan, preserving tax-deferred status.
What is Rollover IRA?
A rollover IRA is an individual retirement account that receives assets transferred from a qualified employer-sponsored retirement plan, such as a 401(k), 403(b), or pension, when an employee leaves a job or retires. By rolling the funds directly into an IRA (a direct rollover), the account holder avoids income taxes and the 10% early withdrawal penalty that would apply to a cash distribution. A rollover IRA provides more investment flexibility than most employer plans — access to a wider selection of stocks, bonds, ETFs, and mutual funds — and consolidates retirement savings in one account. The employee has 60 days to complete an indirect rollover (when the check is made out to them) to avoid tax consequences, but direct rollovers have no time limit.
Example
An employee leaves a company with a $120,000 401(k) balance. Instead of cashing out (which would trigger income taxes plus a 10% penalty), she requests a direct rollover to a brokerage IRA. The funds transfer within a week, the account retains its tax-deferred status, and she can now invest in any securities her new brokerage offers — far more flexibility than her former plan's limited fund menu.
Source: IRS — Rollovers of Retirement Plan and IRA Distributions