Yes. A Rollover IRA functions exactly like a traditional IRA. The name “Rollover IRA” simply refers to the fact that your IRA account was established from funds that were originally in a qualified plan such as a 401k, 403b, or lump sum pension. When I left my corporate job in 2007, I no longer had the option of participating in a company-sponsored 401K. Rather, than leave my funds in my pre-existing 401K, I rolled them into a Rollover IRA, so that I could pick and choose the stocks I invested in.
By rolling those funds from a 401K into a IRA, I did not have to pay taxes on the “distribution” from my 401K. In essence I was simply moving cash from one tax-protected account to another. Had I elected instead to take a cash distribution from my 401K and let it sit in my bank account for more than two months, then used that cash to establish an IRA, I would have been subject to tax penalties for withdrawing funds from my 401K early.
It took me a lot of Web surfing to find out that after the initial funds had been moved from my 401K to my Rollover IRA, I was, in effect, using a Traditional IRA (more info at RetirementThink.com). The name’s different, but the tax benefits are the same. I can contribute up to $5,000 a year (or $6,000 a year once I hit 50 years old) to my Rollover IRA and write off those contributions – thereby lowering my taxable income. Lower taxes = great news!
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Tags: IRAs, IRS, retirement, taxes
