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Over the course of a career, it’s not uncommon for a person to accrue a variety of retirement accounts: 401(k)s from one or multiple employers, IRA(s) with different companies, etc. But having multiple accounts with different companies can get complicated, making it difficult for you to keep an eye on fees, diversification and your overall financial picture.  

If you’re looking to simplify your retirement plan and accounts, an IRA rollover might be a good option for doing so. 

Below, we’ll provide a high-level overview of both IRAs and 401(k)s. We’ll then define what an IRA rollover is, discuss why you might choose to pursue one and explain the challenges you should be aware of before kicking off the process.  

What is an IRA? 

An individual retirement account (IRA) is a type of self-directed investment account that allows you to save for retirement while realizing tax benefits. 

Unlike a 401(k), an IRA is not sponsored by an employer. This means that anyone who has earned income during the year can open and contribute to an IRA. How much you can contribute will depend on your age. In 2023, those younger than 50 can contribute up to $6,500 per year, and those 50 or older can contribute up to $7,500 per year.  

IRAs come in traditional (contributions are not taxed; future withdrawals are taxed) and Roth (contributions are taxed; future withdrawals are not taxed) varieties, each of which offers different benefits.  

What is a 401(k)? 

Like an IRA, a 401(k) is a type of tax-advantaged investment account that you can use to save for retirement. Also like an IRA, a 401(k) can come as either traditional or Roth, offering you variety in how you plan your retirement. The key differences between a 401(k) and an IRA lie in their eligibility requirements and contribution limits.

A 401(k) is sponsored by an employer. This means that you can contribute to a 401(k) only if your employer offers a plan (and you qualify for that plan). Many employers offer a company match, which can supercharge your ability to save.  

A 401(k) also comes with a much higher contribution limit compared to an IRA. In 2023, employees younger than 50 can contribute up to $22,500 per year to a 401(k), while those 50 or older are eligible to contribute up to $30,000. 

What is an IRA rollover? 

An IRA rollover is a process for transferring funds—rolling them over—from one (or multiple) retirement accounts into a traditional IRA or a Roth IRA. The resulting account is sometimes also called a rollover IRA. 

What kinds of accounts you can roll over will depend entirely on the types of retirement accounts that you have. If you have multiple IRAs, for example, you might choose to roll them over into a single account. Or if you have a traditional IRA, you may want to convert it to a Roth IRA to change when and how the money is taxed.

Likewise, if you have one or multiple 401(k)s from previous employers, you might choose to roll those accounts over into an IRA. This is very different from a 401(k) rollover, which involves rolling over a 401(k) from an old employer into a new 401(k) account. 

Why do people pursue an IRA rollover? 

There are many potential reasons to consider an IRA rollover. Some of the most common include:  

  1. Simplicity: Consolidating multiple accounts into a single IRA makes it much easier to keep track of how you are progressing toward your retirement goals. It also makes it easier to understand the fees you are being charged and how your funds are diversified. 

  1. More investment options: While 401(k)s can be an effective means of saving for retirement, you will often be limited in the types of investments that you can make through your account. Converting a 401(k) into an IRA can open more options.  

  1. An inability to leave your account where it is: When you leave an employer, many employers will allow you to leave your 401(k) behind in their custody. But some employers will not. In such a case, you will need to pursue either a 401(k) or an IRA rollover. 

  1. Pursuing a Roth conversion: Some investors who have funds in a traditional 401(k) may be interested in converting their accounts to Roth accounts in order to take advantage of certain tax benefits. An IRA rollover offers one such path to pursue a Roth conversion.  

Is there a limit to how much you can roll over? 

There is no limit on how much money you can roll into a rollover IRA, and a rollover will not count toward your annual contribution limit. There are, however, limits to how frequently you can pursue rollovers.  
Generally speaking, if you pursue an IRA rollover but leave some money behind in your original account, you will not be able to pursue another rollover from that account for one year. Likewise, the account that received the rollover funds itself will not be able to be rolled over for one year.  

Make an informed decision 

Pursuing an IRA rollover can be a complicated process—and one that may come with tax implications, among other considerations. With this in mind, it’s important to understand how an IRA rollover might impact your tax bill and overall financial plan before you initiate the process.  
If you’re unsure about your ability to weigh the tax implications of pursuing an IRA rollover, it can be a good idea to work with a financial advisor or a tax professional to help you weigh your options and evaluate the potential benefits that an IRA rollover might present.

This article is provided by Northwestern Mutual. Learn more about retirement planning from a licensed financial advisor using our one-of-a-kind Find An Advisor tool.