What is an IRA rollover?

An IRA rollover specifically refers to the process of transferring funds from one retirement account to another, typically from one Individual Retirement Account (IRA) to another IRA or retirement plan, without incurring tax penalties. This is an important mechanism for maintaining the tax-deferred status of retirement savings, allowing individuals to move their funds between accounts in a way that preserves their tax advantages.

When performed correctly, a rollover can help an individual consolidate retirement savings, take advantage of different investment options, or switch to a plan that better fits their financial goals, all while avoiding immediate tax liabilities or penalties associated with early withdrawals. This compliance with IRS rules ensures that funds continue to grow tax-free until they are legally withdrawn during retirement.

Other choices do not accurately describe an IRA rollover. For instance, withdrawing funds from an IRA for immediate cash needs represents a distribution, which can trigger taxes and potential penalties if taken prior to retirement age. Converting a traditional IRA into a Roth IRA is a specific type of transaction known as a conversion, which comes with distinct tax implications and is not classified as an IRA rollover. Finally, closing an IRA account permanently does not align with the concept of moving funds to maintain retirement savings.