I want to rollover to an IRA. What accounts do I need to open?

What is an IRA?

IRA stands for Individual Retirement Account. IRA’s are investment accounts that individuals can open at a financial institution and use to save for retirement. They are called “individual” accounts because anyone can open one, as opposed to employer-sponsored retirement accounts (like a 401(k)) that your employer provides for you.

What IRA accounts do I need to open?

IRAs come in an array of styles — Traditional and Roth being the most popular. There are also other types, such as spousal, SEP, SIMPLE and nondeductible types. For the purpose of rollovers, you only have to consider Traditional and Roth IRAs.
Traditional 401k balance (pre-tax) → Traditional IRA

Roth 401k balance (post-tax) → Roth IRA
If you currently do not have an IRA and planning to open one - we recommend that you open both a Traditional and a Roth IRA account while you are at it. In most cases, there are no account opening or maintenance fees for these accounts even if you don’t have any balance in them.

What about a rollover IRA, do I need one?

No, you will not need to open a rollover IRA, because “Rollover IRA” is just a subcategory of “Traditional IRA.” In other words, a rollover IRA is a traditional IRA. Specifically, rollover IRAs are traditional IRAs that contain nothing but assets that came from an employer-sponsored plan. Some employer plans only accept rollovers from an IRA when the IRA contains only assets from another employer-sponsored plan. So keeping those assets separate in their own IRA (rather than combining them with other assets in a traditional IRA) could preserve your ability to roll those assets into a different employer plan at a later date. But fewer and fewer employer plans have this policy every year, so this distinction is becoming less relevant.

If you are unsure about which IRA provider to pick, we strongly recommend using the list provided on Manifest's app to help you make this decision. We've researched 4,000+ IRA providers to identify some of the best. 

That covers the relevant topics about IRA's pertaining to rollovers. If you want to learn more about the characteristics of Traditional and Roth IRA’s, read on...

Traditional IRA

The traditional IRA is the most popular of the individual tax-advantaged retirement savings accounts. The features include:
  • Accepts traditional (pre-tax) rollovers from an employer-sponsored retirement account such as 401(k), 403(b), etc. These plans almost always have pre-tax assets.
  • Investment earnings are not taxed as long as the money remains in the protection of the account.
  • Withdrawals in retirement are taxed at your tax rate at the time of withdrawal.
  • You could also contribute up to $6,000 a year, ($7,000 if age 50+). Contributions may be tax-deductible, thus lowering your taxable income for the year. It depends on your current income, plus whether you or your spouse has a workplace retirement plan.

Roth IRA

A Roth IRA provides a nice tax-saving counterbalance to a traditional IRA. Here are its key features:
  • Accepts Roth (post-tax) rollovers from an employer-sponsored retirement account such as 401(k), 403(b), etc.
  • While contributions are not deductible — meaning there’s no upfront tax break — withdrawals in retirement are completely tax-free.
  • Roth IRA withdrawal rules are more lenient, allowing tax-free and penalty-free withdrawals of contributions at any time. Taxes and penalties apply to withdrawing earnings before retirement, with a few exceptions.
  • You could also contribute up to $6,000 a year ($7,000 if age 50+). Eligibility to contribute to a Roth is based on your income.
If you want to read about all the different types of IRA accounts, the IRS has some resources you could use: https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans
The frequently asked questions, or FAQs, are intended to be helpful and to get you thinking in a more sophisticated manner about your account transfer and related issues. However, these are not meant for accounting, tax, finance, or legal advice, not intended to be exhaustive, and do not create any relationship or duty on our part to assist your particular situation. We offer no warranties on the accuracy or completeness of the information as there could be developments of any kinds, including, but not limited to, any changes in relevant laws and regulations.