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Hi, I'm wondering if I can contribute the $5,000 a year to a an existing rollover IRA that was previously funded?

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!

Jun 27, 2014 by Kevin from La Jolla, CA in  |  Flag
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7 votes
Peter C. Karp Level 20


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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Comment   |  Flag   |  Jul 02, 2014 from San Francisco, CA

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Hello Kevin,

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

3 Comments   |  Flag   |  Jun 28, 2014 from Jacksonville, FL

Very helpful - thanks, Jonathan. Interesting idea to have an 'extra 401k' laying around to draw from penalty free post 55 if I loose a job. Just so I'm clear I wanted to propose a hypothetical: I work at company A for 5 years, and each year I max my 401k and contribute $5.5k to my IRA. I leave Company A, rollover all 401k funds to my IRA, join company B, fully load 401k for 3 years there while still contributing the $5.5k to the IRA. After I leave company B, I rollover all funds from 401k to THE SAME IRA, and join company C, where I keep doing the same. Good to go?

Flag |  Jun 29, 2014 near La Jolla, CA
Jonathan N. Castle, MSFS, CFP®

Well - you will certainly be building wealth and you will have the advantages of a consolidated portfolio strategy if you keep rolling your 401k's into your IRA. There is no problem with that, and a lot of advisors recommend that. HOWEVER - AS SOON AS you roll the funds into your IRA - you LOSE the early withdrawal feature that 401k's have. So, no, you are not "good to go" if you need the money before age 59 and 1/2 and have rolled the funds into an IRA. So, unless your needs happen to coincide with the published early withdrawal exceptions (death, disability, first time home purchase, education, etc) - then you LOSE the ability to make penalty-free withdrawals at age 55, if you are separated from service. However, if you keep some funds in an old 401k, then you have this ability. Some people just choose the "best" 401k they have to keep around - if it is low cost and has good investment options. Others use their current company's 401k with the intent to keep the funds there if they lose their job. The trick is balancing flexibility and control with ease, investment options, and cost.

Also - having TOO much money in IRA's or tax-deferred type assets can cause problems in retirement. This is why we advocate the use of Roth IRA's, after-tax accounts, and looking at occasional Roth Conversions, depending upon what your tax bracket is shaping up to be for that particular year. Doing it yourself is ok, good, and cheap - but at a certain point, - especially once you have accumulated a reasonable-sized portfolio and your life is complex with college or retirement planning - if you want to go to the "next level" most people need an advisor who specializes in this field and has professional-grade software to help model different scenarios and come up with the optimal plan of action based upon your particular circumstance.

Jon Castle

Flag |  Jun 30, 2014 near Jacksonville, FL

Got it. Thanks, Jon. Basically, I'm weighing 4.5 yrs of a safety net against the added fees of the 401k, so if I want the safety net of having the one 401k to draw from when I'm out of a job at 55, I need to make sure it's the 'best one' in terms of cost, investment options, etc. (And...this is where BrightScope's 401k ranking comes to play...) I'm not at the point where I have too much retirement money saved up yet.... but hope to be there soon ;)

Flag |  Jun 30, 2014 near La Jolla, CA

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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.

Comment   |  Flag   |  Jun 29, 2014 from Miami, FL

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Rich Winer Level 20

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.

Comment   |  Flag   |  Jun 27, 2014 from Woodland Hills, CA

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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.

1 Comment   |  Flag   |  Jul 01, 2014 from Suffolk, VA

Very interesting - that makes a big difference! Thanks, Arie.

Flag |  Jul 01, 2014 near La Jolla, CA

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0 votes

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.

Comment   |  Flag   |  Jun 30, 2014 from Tucson, AZ

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