What is a rollover IRA?

A rollover IRA is an individual retirement account that holds money moved over from a former employer’s retirement plan — like a 401(k) or 403(b) — or from another IRA. Done correctly, a rollover isn’t a taxable event: the money keeps its tax-advantaged status and stays invested. Rolling over is one of several options for an old employer plan. 

How does a rollover IRA work? 

When you leave a job, the money in your old employer plan doesn’t have to stay there. Rolling it into an IRA is one of several options. Which IRA receives it depends on how the money was contributed: pre-tax plan money generally goes to a Traditional IRA and keeps growing tax-deferred, while Roth money from the plan generally goes to a Roth IRA. 

Some people keep rollover money in its own account to keep it separate from new annual contributions. Importantly, a rollover is not subject to the annual IRA contribution limit — you can roll over any amount, no matter how large. 

Consolidating an old account is part of the same “bring it all to one place” move as transferring a brokerage account. 

Direct vs. indirect rollover (and the 60-day rule) 

There are typically two ways to move the money:

1. A direct rollover sends it straight from your old plan to your IRA;
2. An indirect rollover pays it to you first, which triggers withholding and a 60-day deadline. 

	Direct rollover (trustee-to-trustee)	Indirect rollover (60-day rollover)
How the money moves	Straight from your old plan to your IRA — you never take possession	The plan pays the money to you, then you deposit it into an IRA
Withheld up front	Nothing	Employer plans are generally required to withhold 20%
Deadline	None	60 days from the date you receive the funds
If you miss it	Not applicable	Any amount not deposited is treated as a taxable distribution, plus a possible 10% penalty if you’re under 59½
One-per-12-months limit	Does not apply	Applies to indirect IRA-to-IRA rollovers only

Why the 20% withholding matters. Say your old plan balance is $80,000. The plan withholds $16,000, so you receive $64,000 — but to complete a full rollover you must deposit the entire $80,000 within 60 days, covering that $16,000 out of pocket (the withheld amount is credited toward your taxes for that year). Deposit only the $64,000 you received and the missing $16,000 counts as a taxable distribution. 

The one-per-12-months limit does not restrict direct trustee-to-trustee rollovers or 401(k)/403(b)-to-IRA rollovers, so it isn’t a reason to avoid the direct route. Because the tax consequences of an indirect rollover can be significant, many people choose a direct rollover, and it may help to consult a tax professional. The IRS rollover rules are the authoritative source. 

Rollover IRA vs. Traditional IRA: what’s the difference? 

Functionally, a rollover IRA is a Traditional IRA, and the label only signals that the money came from an employer plan. What actually changes your tax bill is where you send the money: 

What you’re moving	Where it goes	Tax treatment
Pre-tax plan money	Traditional / rollover IRA	Generally not taxable
Pre-tax plan money	Roth IRA	A Roth conversion — generally taxable in the year you convert, and the pro-rata rule may apply
Roth 401(k) money	Roth IRA	Stays tax-free — Roth-source money keeps its Roth treatment

Your old plan may hold both pre-tax and Roth money, and the two can go to different destinations. If you’re weighing which account type should receive your rollover, Traditional IRA vs. Roth IRA walks through the tax tradeoffs, and it may help to consult a tax professional. 

One more distinction: a rollover and a transfer aren’t the same. Rolling over a 401(k) usually means it’s liquidated to cash and moved. Moving an existing IRA from another brokerage can often be done as an in-kind transfer — your investments move as they are, and, like a proper rollover, it’s generally not a taxable event. 

Should you roll over — and where? 

Rolling into an IRA is one option, not the only one. When you leave a job, you can generally: 

• Leave it in your old employer’s plan (if allowed) — no action is required and the money stays tax-advantaged. The trade-off is a limited investment menu and a separate account to keep track of. 

• Roll it into your new employer’s 401(k) (if the plan accepts rollovers) — keeps your workplace savings in one place. The trade-off is that you’re limited to that plan’s investment options and rules. 

• Roll it into an IRA — typically a wider range of investment options and one account to manage. The trade-off is that pre-tax money in an IRA can affect the tax treatment of a future Roth conversion. 

• Cash it out — the money is available to you immediately, but this is generally the most costly choice: it’s taxed as ordinary income, may face a 10% penalty if you’re under 59½, and the balance no longer grows tax-deferred. 

Each has trade-offs, and the right choice depends on your situation. 

One important caution for higher earners: if you use (or plan to use) a backdoor Roth IRA, rolling pre-tax money into a Traditional/rollover IRA may create a pro-rata tax problem that makes your future backdoor Roth conversions partly taxable. It’s an easy and costly oversight — worth confirming with a tax professional whether this applies to your situation before you move pre-tax money into an IRA. 

How to roll over an old 401(k) or 403(b) 

At a high level, a rollover has three steps: open the IRA that will receive the funds, contact your old plan administrator to request a direct rollover, and choose how to invest the money once it lands. The details differ by the type of account you’re leaving, so each one is covered in depth here: 

• Rolling over a workplace 401(k)? See 401(k) rollover: navigating your options. 

• Rolling over a 403(b)? See how to roll over a 403(b) to an IRA. 

In practice this often means contacting your old provider — sometimes by phone — and some plans still mail a paper check, so allow a couple of weeks. One step people can sometimes forget: the money usually arrives as cash, and uninvested cash isn’t working toward your goals. It isn’t invested until you choose what to buy, so try not to leave it sitting idle. 

Rolling over to an M1 IRA 

You can roll an old employer plan into a Traditional or Roth IRA at M1. Once the funds arrive, you can build a custom portfolio or start from a pre-built one, and set a recurring schedule so new deposits are directed toward your underweight positions automatically. 

The M1 bottom line 

A rollover IRA holds retirement money moved out of an old 401(k) or 403(b), keeping it tax-advantaged and invested for the long term. A direct rollover is generally the simplest way to do it, and rollovers aren’t limited by the annual contribution cap. Because the tax rules — especially around indirect rollovers, backdoor-Roth pro-rata, and Roth conversions — can be nuanced, it may help to consult a tax professional about your situation. 

When you’re ready, you can start a rollover with M1. 

Frequently asked questions about rollover IRAs

Investing involves risk, including the possible loss of principal. This content is educational and is not personalized investment, tax, or legal advice. M1 does not provide tax advice; consult a qualified professional about your situation. Tax rules referenced are set by the IRS and change periodically — verify current rules at IRS.gov. Brokerage products and IRAs are offered by M1 Finance LLC, member FINRA/SIPC. M1 charges a $3 monthly platform fee — not a per-trade commission and not a percentage-of-assets management fee — and it is waived if you hold $10,000 or more in total M1 assets (see the Platform Fee Disclosure). Other fees may apply; see the M1 Fee Schedule.

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