Is a rollover IRA a traditional IRA?

You have left a job or retired, and the 401(k) from that job is still in the old employer's plan. If you move it to an IRA, the new account will probably be called a rollover IRA. Is a rollover IRA a traditional IRA? Yes. A rollover IRA is a traditional IRA that holds money moved from a workplace plan. The tax rules are the same, and "rollover" is a label the firm that holds the account uses.¹

Two other things matter more than the label: how you move the money, and what you can do in the plan that you cannot do in an IRA. This page covers both. The rules and the citations are in the detailed version below.

Is a rollover IRA a traditional IRA?

Yes. The tax law has no separate kind of account called a rollover IRA. The IRS treats any IRA that is not a Roth IRA or a SIMPLE IRA as a traditional IRA, and a rollover IRA is in that group.¹

The label shows where the money came from. A rollover IRA starts with a balance moved from a 401(k), a 403(b), a pension or another workplace plan. A traditional IRA that you opened yourself often holds only your own yearly contributions. Some people keep the two apart so the rollover money is easy to identify if they later move it into a new employer's plan. The IRS calls an IRA used that way a conduit IRA.²

You do not have to keep them apart. You can add your own contributions to a rollover IRA, and you can combine it with another traditional IRA. The tax on the money is the same either way.

Rollover IRA vs traditional IRA: what is the same?

Everything about how the money is taxed is the same.

• Withdrawals are income. What you take out is taxed as ordinary income in the year you take it, except for any part that was already taxed.³
• Withdrawals before 59½ generally cost 10% more. A 10% additional tax applies to money you take out before 59½, unless an exception fits.³
• Required withdrawals begin at 73 or 75. The starting age depends on your birth year, and it applies to an IRA whether or not you are still working.⁴
• All your traditional IRAs are counted together. When part of your IRA money has already been taxed, the law treats all your traditional IRAs as one account to decide how much of a withdrawal or a conversion is taxable.⁵

That last point matters if your income is too high to contribute to a Roth IRA directly. A large rollover IRA can make most of a backdoor Roth contribution taxable when you convert it. What is a backdoor Roth IRA? explains why.

What are the withdrawal rules for a rollover IRA?

They are the traditional IRA withdrawal rules. You can take money out at any time, and the taxable amount is added to your income for the year.³

If you are under 59½, the 10% additional tax generally applies on top of the income tax. The exceptions for an IRA include a total and permanent disability, a series of substantially equal payments, unreimbursed medical expenses above 7.5% of your income, higher education expenses, and up to $10,000 toward a first home.⁶

Starting at 73 or 75, you have to take a required minimum distribution, or RMD, every year. Our guide to RMDs explains the rules.

How do you move a 401(k) to an IRA?

There are two ways, and the difference between them is what happens to the money on the way.

A direct rollover. You ask the plan to send the money straight to the IRA. The plan may hand you a check, but it is made out to the new account and not to you. Nothing is withheld, and nothing is taxed.⁷

A 60-day rollover. The plan pays the money to you, and you have 60 days to put it into an IRA. The plan has to withhold 20% for federal income tax, even if you plan to roll the money over.⁷

Here is a hypothetical example. Suppose your old 401(k) holds $500,000 and the plan writes the check to you. In the example the plan withholds $100,000, and you receive $400,000. To move the whole $500,000 you have to deposit the $400,000 and add $100,000 from other savings within 60 days. If you deposit only the $400,000, the other $100,000 is taxed as income this year, and before 59½ the 10% additional tax can apply to it as well.⁸

A check made out to you arrives with 20% held back for tax, and you have 60 days to make up the difference from other money.

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A check made out to you arrives with 20% held back for tax, and you have 60 days to make up the difference from other money.

The IRS's own guide says the direct rollover will generally be to your advantage for that reason.⁸

One limit you may have heard of does not apply here. You can make only one rollover from one IRA to another in any 12-month period. That limit does not apply to a rollover from a workplace plan to an IRA, or to a direct transfer from one IRA to another.⁹

What do you give up when you leave the plan?

A few things work in a 401(k) and not in an IRA. Check these before you move the money.

Withdrawals between 55 and 59½. If you leave your job in or after the year you turn 55, withdrawals from that employer's plan are not subject to the 10% additional tax. That exception does not apply to an IRA. Once the money is in a rollover IRA, a withdrawal before 59½ generally brings the 10% tax back.¹⁰

Employer stock. If your 401(k) holds shares of your employer's stock, the law lets you take the shares out of the plan in a lump-sum distribution and leave their growth untaxed until you sell them. You pay ordinary income tax at the start only on what the plan paid for the shares. Shares rolled into an IRA lose that treatment, and every dollar is ordinary income when it comes out.¹¹ Our net unrealized appreciation calculator compares the tax each way.

Working past the RMD age. If you are still working for the employer that sponsors your plan, you can generally wait to take RMDs from that plan until the year you retire, unless you are a 5% owner of the business. An IRA has no such exception.⁴

Getting back into a plan. You can often move a rollover IRA into a new employer's 401(k) later, but the new plan is not required to accept it.¹²

Moving the money is a choice, not a requirement. Your old plan may let you leave the balance where it is, and a new employer's plan may accept it directly.

What about a Roth 401(k)?

A rollover IRA usually holds pre-tax money. If part of your old plan is a Roth 401(k), that part can be rolled into a Roth IRA.¹³

Moving pre-tax 401(k) money into a Roth IRA is a different thing. It is a conversion, and it is taxed in the year you do it.¹³ What is a Roth conversion? explains how that works, and Roth vs traditional 401(k) explains the two kinds of account.

Does Illinois tax withdrawals from a rollover IRA?

No. Illinois starts from the income on your federal return, and then it subtracts the federally taxed part of what you received from an IRA or a qualified workplace plan. A withdrawal that is taxed on your federal return is not taxed on your Illinois return.¹⁴

What goes wrong with a rollover?

These are the mistakes we see most often.

People ask the old plan for a check made out to themselves, and 20% is withheld that they then have to replace from savings.

People miss the 60-day deadline, and the whole amount is taxed as income that year.

People who leave a job at 55 or later roll the 401(k) into an IRA, then need money before 59½ and owe the 10% tax the plan would not have charged.

People roll employer stock into the IRA with everything else and give up the special treatment of its growth.

People with a large rollover IRA try a backdoor Roth contribution and find most of it taxable.

People leave small 401(k)s at several old employers and lose track of them.

People move pre-tax 401(k) money into a Roth IRA thinking it is a rollover, and are surprised by the tax.

Where we fit in. We integrate tax considerations into your investment strategy and collaborate with estate attorneys and CPAs to ensure your plan is coordinated. We are not a law firm or accounting firm, so we do not provide legal or tax advice. Everything in this material is for educational purposes, based on primary sources. Before taking any action, please consult the appropriate professionals to apply these ideas to your situation.

The label on the account will not change your tax. The way the money gets there can. If you would like to go through the move with someone before you sign the plan's form, we are glad to have that conversation.