Rollover IRA vs. Roth IRA: What's the Difference?

There’s some overlap, but these accounts aren’t interchangeable

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Rollover IRAs and Roth IRAs are both individual retirement accounts (IRAs). A Roth IRA is a retirement savings account into which you make after-tax contributions that can later be withdrawn tax-free. A rollover IRA can be either a traditional IRA or a Roth IRA into which you roll over assets from a former employer’s retirement plan such as a 401(k).

Let’s take a closer look at how these two types of IRAs overlap, and the important differences between them.

What’s the Difference Between a Rollover IRA and a Roth IRA?

  Rollover IRA Roth IRA 
Account Type Either a pretax (traditional) or after-tax (Roth) IRA in which you deposit funds from an employer-sponsored retirement plan After-tax account for individual retirement savings
Eligibility Must have an employer-sponsored plan Must meet income limitations based on tax filing status
Taxes Can avoid paying taxes on the rollover by following proper steps; additional taxes may apply on later withdrawals, depending on account structure Contribute after-tax dollars, which can then grow tax-free and be withdrawn tax-free in retirement
Required Minimum Distributions May apply, depending on account structure None during the owner’s lifetime
Five-Year Rule Applies if the rollover IRA is set up as a Roth IRA Applies

Account Type

A rollover IRA is an IRA used to receive assets from an employer-sponsored qualified retirement plan such as a 401(k).

While a financial institution might advertise a “rollover IRA,” it’s really just a marketing term. The account would actually be either a traditional IRA or a Roth IRA used for the particular context of moving retirement assets from an employer-sponsored plan.

A Roth IRA is a retirement savings account to which you contribute after-tax dollars. Your contributions are not tax-deductible, but you can make tax-free withdrawals in retirement as long as you meet certain conditions. In contrast, with a traditional IRA, your contributions may be tax-deductible and withdrawals are taxed.

Eligibility

To be eligible for a rollover IRA, you need to have funds in an employer-sponsored qualified retirement plan such as a 401(k) or a 403(b). You can simply open an IRA at your choice of financial institution to receive those funds.

If you already have a traditional IRA or a Roth IRA, you could choose to roll assets from your employer-sponsored plan into it, making that account effectively serve as a rollover IRA. However, this option could create complications down the road. For example, if you want to eventually move rolled-over funds into a new employer-sponsored plan—such as if you get a new job—it might be clearer to maintain a separate rollover IRA instead of combining funds with an existing IRA. That’s because making contributions to a rollover IRA after the rollover itself may prevent you from moving funds to an employer-sponsored plan in the future.

Eligibility for a Roth IRA depends on whether or not you’re rolling over assets. If you’re rolling over funds into a Roth IRA, you can do so without worrying about income restrictions. But if you want to make direct contributions to a Roth IRA, you’ll need to meet income requirements based on your modified adjusted gross income (MAGI). For 2022, the full contribution is $6,000 per person, plus an additional $1,000 catch-up contribution if you’re age 50 or older.

Roth IRA Income Limits
Filing Status Full Contribution Reduced Contribution  Not Eligible To Contribute
Single or head of household MAGI of less than $129,000 MAGI of greater than or equal to $129,000 but less than $144,000 MAGI of greater than or equal to $144,000
Married filing jointly or qualifying widow(er) MAGI of less than $204,000 MAGI of greater than or equal to $204,000 but less than $214,000 MAGI of greater than or equal to $214,000

If you’re married and file separately, your eligibility depends on whether you lived with your spouse for any part of the year. If you’re eligible for a reduced contribution, see the IRS site for calculation instructions.

Taxes

If you follow the rules for moving funds from an employer-sponsored plan into a rollover IRA, the transaction generally doesn’t trigger any taxable events, even if you later receive a copy of a tax form that explains the transaction.

For example, you can avoid a taxable event by making a direct rollover, in which your employer-sponsored plan sends your money directly to your IRA provider. You may want to ask your current plan provider for help with this process.

If you do an indirect rollover, such as if your employer-sponsored plan sends you a check with taxes withheld, you need to deposit that money into an IRA within 60 days. You’ll also need to “top up” your deposit with the amount of tax withheld so that you roll over the full amount to avoid further taxes. If you don’t roll over the full amount, including the amount of taxes withheld, the amount that was withheld will count as taxable income (although you still get credit for that amount as taxes paid that year). Plus, you’ll typically have to pay a 10% penalty on the amount that was not rolled over.

The account structure of your rollover IRA also affects taxes. A traditional IRA allows for tax-deductible contributions, and you’ll pay taxes on your withdrawals in retirement. A Roth IRA, whether used for rollover purposes or on its own, involves after-tax contributions, which can then be withdrawn tax-free if you meet certain conditions, such as being at least age 59 ½.

Required Minimum Distributions

Traditional IRAs have required minimum distributions (RMDs), generally starting at age 72. Roth IRAs have no RMDs. So the question of whether rollover IRAs have RMDs depends on whether you roll over funds into a traditional or Roth IRA.

If you're 72 or older and want to roll over assets from an employer-sponsored plan to an IRA, you still have to take the RMD for that year.

Five-Year Rule

One requirement for making tax-free withdrawals of earnings from a Roth IRA is that the account needs to have been open for at least five years, starting from January 1 of the year the first contribution is made. The same five-year rule applies to a Roth IRA whether you opened the account for direct retirement contributions or to roll over assets from an employer’s plan.

The five-year rule only applies to Roth IRA earnings. Your contributions are always yours to withdraw, no matter how long you’ve had the account.

However, traditional IRAs do not need to be open for a certain amount of time, as the withdrawals are taxable regardless. So a rollover IRA may or may not have to follow the five-year rule, depending on whether it’s a traditional IRA or a Roth IRA.

The Bottom Line

Rollover IRAs and Roth IRAs can overlap, such as if you roll over assets from an employer-sponsored plan to a Roth IRA. However, a rollover into a traditional IRA would have very different rules, particularly around taxes.

In some cases, it’s possible to use both types of accounts. For example, if you leave your employer, you might roll over your 401(k) into a traditional IRA to consolidate your assets and take more control of them. If you’re eligible, you might also open a Roth IRA to further save for your retirement, especially if you’re planning to get a new job with access to a new employer-sponsored plan.

Choices around what types of retirement accounts to use can depend on factors such as:

Given the complications of this situation, you may want to speak with a professional to determine what works best for your situation.

Frequently Asked Questions (FAQs)

Are rollover IRAs and Roth IRAs the same thing?

Some rollover IRAs are Roth IRAs, but not all Roth IRAs are rollover IRAs. The difference is that rollover IRAs can be either traditional IRAs or Roth IRAs used for rolling over assets from an employer-sponsored retirement plan into an individual account. Roth IRAs do not have to be opened just for rollovers; they can also be used for direct retirement contributions, subject to income restrictions.

What are the tax implications of Rollover IRAs vs. Roth IRAs?

Rollover IRAs can trigger taxable events if the rules for the rollover are not followed. One way to avoid this is by making a direct rollover from your employer-sponsored plan to your IRA provider. Further taxes depend on the account structure. With a Roth IRA, regardless of whether it’s used for rollover assets or direct contributions, allocations are made with post-tax money, which can then be withdrawn tax-free if relevant conditions are met.

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