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How a Rollover IRA Works

A new rollover IRA can simplify your retirement finances and open up new investment choices for the money you currently hold in old 401(k) plans and IRAs. But, with new choices come new responsibilities: Once your rollover is complete, you’ll need to invest your money—and make plans for managing those investments going forward.

You have many choices for investing funds in a rollover IRA, including self-managed IRA brokerage accounts, robo-advisors, target-date funds, and getting help from a professional investment advisor. If you’re considering an IRA rollover, you may want to think through your investing options first, so you can make informed choices throughout the rollover process.

How a Rollover IRA Works

A rollover IRA is designed to receive funds from 401(k) plans and other IRAs. If you’ve left your job and have money in a 401(k), you can move those funds into a rollover IRA so you have direct control and don’t have to rely on a former employer to manage your funds.

You can also use a rollover IRA to consolidate old IRA accounts into one, giving you fewer accounts to track. IRA rollovers do not count toward your annual IRA contribution limit.

As long as you follow IRS guidelines, rolling funds into a single IRA shouldn’t trigger capital gains taxes, income tax, or early withdrawal penalties. Here are a few broad considerations:

• Roll regular 401(k) and traditional IRA funds into a traditional rollover IRA.
• Roll Roth funds into a Roth IRA.
• Try to roll funds directly into your rollover IRA. If you receive a check or direct deposit to your bank account instead, be sure to move funds to a rollover IRA within 60 days to avoid having the IRS consider the transfer a taxable distribution.

Do You Need to Actively Invest Your Rollover IRA?

One way or another, you’ll need to have an investment strategy for the funds in your rollover IRA. If your rollover funds have been converted to cash, you’ll start from square one by finding a new rollover IRA in which to place your funds. Even if you’ve completed an in-kind transfer of stocks, bonds, or funds from another IRA, your portfolio may need rebalancing if you’ve added cash from liquidated accounts.

Where Can You Invest IRA Funds?

You have multiple options for investing IRA funds. You may choose a fund that allows you to pick your own investments or one that invests on your behalf using your financial goals and tolerance for risk. Here are a few common investments you’ll choose from as you invest in your rollover IRA:

• Select and manage your own individual stocks and bonds. If your IRA offers this option and you’re willing and able to learn investing basics and put together a properly allocated portfolio, you can DIY your specific investments.
• Choose mutual funds, index funds, or exchange-traded funds (ETFs). Funds combine multiple holdings to add built-in diversification. For example, mutual funds and ETFs may invest in a proportional mix of stocks, bonds, and cash. Index funds follow indexes like the S&P 500. Funds allow you to invest broadly and, depending on the funds you choose, may charge low fees.
• Consider target-date funds. These funds maintain an age-appropriate blend of investments that rebalances as you approach retirement.

If you don’t have the time or inclination to choose and manage your rollover IRA investments yourself, you could consider one of these options:

• Use a robo-advisor. Robo-advisors are automated platforms that invest your money according to your needs and preferences. Using the information you provide, a robo-advisor will put together an investment portfolio that meets your objectives and will adjust your holdings as market conditions (and your needs) evolve.
• Find an investment advisor to manage your funds. Choose a financial advisor who specializes in investing, and have them build and maintain a retirement portfolio for you. Working with a professional advisor will cost you money in fees. On the other hand, you’ll have a live human with whom to discuss retirement goals and other financial issues.

How to Invest a Rollover IRA

Once you know how you want to invest your funds, follow these steps for a successful rollover:

1. Open an account. Choose an IRA provider that offers the type of account (and investments) you want, then open an account. You may find a brokerage with rollover specialists who can help you navigate the transfer process and investment tools that help you allocate your money wisely. Look closely as you shop for a provider: Some have more than one type of IRA; for example, self-directed and advisory. If you want a rollover IRA that provides access to a live advisor, find out if you qualify (accounts that offer one-on-one advising may have account minimums).
2. Fund your account. Although you can have funds sent to you via check or electronic transfer, the IRS requires 20% withholding on withdrawals from retirement plans and 10% on IRA withdrawals when the money is paid directly to you. If you can, do a direct rollover by requesting an electronic transfer to your new IRA account or a trustee-to-trustee transfer by check.
3. Invest your funds. Invest your money as planned, either by yourself or using a rollover IRA that chooses investments on your behalf based on your preferences.
4. Stay invested. Plan to stay engaged by monitoring your investments and making adjustments over time. Even if you’re investing in target-date funds or have advisors on the case—and don’t need to manage day-to-day investing—you’ll want to check in regularly on your progress.

The Bottom Line

Rolling money from old 401(k) plans and IRAs into a single IRA can streamline your retirement finances and make it easier to stay on top of your investments. If you’re still not sure how or where to invest, now’s the time to learn more about the many options you have. This could be your moment to become an active trader, find a platform or family of funds you like working with, or establish a long-term relationship with a financial advisor. Retirement savings is a long haul: It’s good to be comfortable in the driver’s seat.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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