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What is an IRA Rollover?

Michael Pollick
Updated May 17, 2024
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There are two common methods employees use to save money for retirement: a company-sponsored 401(k) or an Individual Retirement Account (IRA). Both plans involve setting aside a percentage of income in a tax-deferred account, but an IRA works more like a personal savings account. Whenever an employee with an IRA decides to retire, quit or change jobs, he or she can receive the money saved in an IRA as one lump sum. This is known as an IRA rollover.

When an employee reaches retirement age, or in some cases a few years younger, the IRA rollover can be converted to a more beneficial retirement account called a Roth IRA. A Roth IRA allows account holders to borrow against the balance with fewer restrictions than a standard IRA. A company-sponsored 401(k) plan, by comparison, places severe restrictions on employee access to accounts.

Even if an employee of a company retires or leaves, he or she is not obligated to request an IRA rollover. The account may stay under the auspices of the original company until the former employee reaches retirement age at a different company. Most employees have 60 days from the time of termination to re-invest their IRA rollover into a new account or investment plan. This may depend, however, on the number of years the employee participated in the IRA plan. As with 401(k) programs, an employee may have to be 'fully invested', generally requiring at least five years of full-time participation.

Many people request an IRA rollover for a number of financial advantages. If a former employee opts to keep his or her IRA under the control of a company in dire economic straits, there is a real possibility the money may not be there later. Employers and former employees may also change locations over time, making it difficult to keep track of older or inactive IRAs. An IRA rollover allows employees to transfer the money directly into a new account, reducing their dependence on former employers.

An IRA rollover does have a few disadvantages, however. Workers who get married after starting an IRA may have to seek spousal approval before naming a different beneficiary. If the IRA account holder wants to name a parent or other relative as the beneficiary, he or she must name them before the marriage. If the IRA holder dies after an IRA rollover, the spouse may become the sole recipient. Bankruptcy proceedings can also seriously affect an IRA rollover. Financial experts suggest that IRA holders considering bankruptcy should not request an IRA rollover before filing. The money could be seized as an asset and used any way the bankruptcy court deems appropriate.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Michael Pollick
By Michael Pollick
As a frequent contributor to WiseGeek, Michael Pollick uses his passion for research and writing to cover a wide range of topics. His curiosity drives him to study subjects in-depth, resulting in informative and engaging articles. Prior to becoming a professional writer, Michael honed his skills as an English tutor, poet, voice-over artist, and DJ.
Discussion Comments
By anon23400 — On Dec 23, 2008

My mom was laid-off 2 months ago and she is of retirement age (exactly 60 year old). Her 401K plan dropped down greatly in value in a matter of 2 months. What can she do to stop or at least minimize her losses as she might not seek work anymore after her layoff and is depending on her money for income for year to come. (The kicker to this is that her company is bankrupt) Please suggest options.

Michael Pollick
Michael Pollick
As a frequent contributor to WiseGeek, Michael Pollick uses his passion for research and writing to cover a wide range...
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