I'm probably over thinking this - but I previously understood there to be a rollover IRA for 401k rollovers and a traditional IRA, for the $5k annual contribution. What I'm wondering is if I can contribute $5k per year to my existing (and previously funded Rollover IRA) and still be able to rollover additional assets from a future 401k plans after I leave the employer. Basically, I'm looking to eliminate the "traditional IRA' and just have one, rollover IRA cover everything. Thanks!
The other advisors have provided a lot of good information. All pre-tax IRA money, traditional and rollover, can be held in one account. IRA contributions can continue to be made to that account. However, what could prove to be problematic would be in the event that the you wanted to rollover the IRA into a qualified plan. For that purpose, traditional IRAs should be held for you outside of any qualified plan rollovers, and IRA rollover accounts should be held in a separate account. Each rollover should be well documented.
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Many people are confused by the limits on an IRA. The limits you are referencing are contribution limits for NEW monies - saved that year. Because retirement plans and IRA's are designed to be portable - any rollovers (or conversions to Roth) are not limited by the annual contribution limits.
It may be important to note that essentially "rollover IRA's" ARE, in fact, "traditional IRA's." Once the dollars are there, they are pretty much all treated the same - AND will affect the taxation of each other, if you have more than one account.
In particular, IRA withdrawals (except for a few exceptions) are subject to income tax upon withdrawal, and a 10% penalty tax for withdrawals before age 59 1/2. HOWEVER - IF you have LEFT your employer - and you KEEP your 401k THERE - with the employer - then you can make penalty FREE withdrawals after you achieve age 55. This is one reason you may consider keeping at least one old 401k around - just in case you need to make a withdrawal before age 59 and 1/2 (such as being laid off, or temporarily injured).
Jon Castle http://www.WealthGuards.com
Although you are asking if you can contribute to a rollover IRA, one question you need to ask your self before rolling over to an IRA is, do you plan to commingled deductible and non-deducted IRA contributions in your IRA rollover account in the future? One alternative is to keep an active 401(k) plan which can help you to “separate” the deductible IRA assets from the non-deducted. This enables you o avoid the “little bit pregnant” rule wherein you must consider all IRA funds pro-rata when making distributions… this could have a significant effect on the longevity of your retirement assets.
Kevin, You can contribute $5,500 in total to any IRA or combination of IRAs ($6,500 if you are over 50). Your annual contributions do not limit your ability to rollover funds from a 401K to your IRA. Also, you can consolidate all of your IRAs into the rollover IRA and maintain the same benefits.
To answer your initial question, the answer is "yes," you can make a contribution to your rollover IRA. I have a word of caution about getting too cute with penalty-free withdrawals from a 401(k). I suggest checking with a CPA before you do that. Here's one answer from Aboutmoney.com which suggests that "old" 401(k)s from employers who you left before you turned 55 may not qualify for the penalty-free withdrawal:
What If You Left Your Previous Employer Before Age 55?
If you left your previous employer before age 55, but now you are over 55, sorry, the special age 55 withdrawal provision does not apply. Any withdrawals you take will be subject to the penalty tax, unless you can roll your 401(k) plan to an IRA and qualify for an exception to the penalty.
just make sure that you have at least $5,500 of earned income. IRA contributions can be as much as 100% of your earned income.