Difference between IRA and rollover IRA?

Investing
#1

What is the difference between a rollover IRA and a traditional IRA?

I have an old 401(k) sitting at Fidelity. I would like to change it to an IRA so I can contribute to it again. Fidelity has a third “rollover IRA” option and I don’t entirely understand the description of it.

I also have an old 403B that I would like to roll over, and my employer, a public school system, has a voluntary 403B which they do not contribute to so I did not open one there. I would like to keep everything consolidated in one place.

Thank you so much!

#2

A rollover is a special type of transfer that is tax-free . In the case of certain employer-sponsored retirement plans, like a 401(k), that money can be rolled back into another 401(k) at a later date. However, only money from a previous retirement plan may be transferred in this way.

A rollover IRA is the same as a traditional IRA, except that only funds rolled over from a previous retirement plan are held in the account. By segregating the monies in this way, a rollover IRA ensures that the funds can be rolled back into a 401(k) plan should the opportunity ever arise. If you contribute money into your rollover IRA, it will cause headaches if you try to convert it back to a new employer-sponsored 401(k). So if you want to invest money into your retirement while between employer-sponsored plans, it’s best to set up a separate, traditional IRA or Roth IRA .

A rollover IRA has the same tax rules on withdrawals, conversions to Roth IRAs and required minimum distributions as a traditional IRA. Most IRA programs allow a single rollover per year.

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#3

Hey @TeacherAshley!

@Pedro gave a great answer!

To summarize: Rollover all former retirement plans into a Rollover IRA (then you never contribute it it again… just leave it there and let it grow). Make all new contributions to a Roth or Traditional IRA.

You’ll end up with a few accounts inside of your Fidelity account. I have like six. that’s just how it goes because of all these little rules!

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#4

@Pedro @Jeremy this makes sense! Thank you!

I have an old 403b that I’d also like to rollover- is that the same process?

#5

Yes! Roll that over to the same Rollover IRA. One Rollover IRA can collect all old employer retirement accounts. (Assuming it’s pre-tax money, not roth/post-tax money… that can be rolled over into a Roth IRA)

#6

@Jeremy Thank you so much!

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#7

I rolled over an employer 401k to a fidelity ira 3 years ago. I’ve been contributing the max limit to it since. I didn’t realize the tax implications! After reading this blog, I think I should stop contributing to it, open a Roth ira, and max that out instead. Does this seem like the best thing to do? Or would it he best to continue building on that existing compound interest? There’s $120,000 in it now.