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What Is a Rollover IRA?

Learn about Rollover IRAs in this Howcast finance video with expert Gregory McGraime.

Transcript

IRA stands for individual retirement arrangement, and when we're talking about a rollover IRA, I want to give you a little background for what that means. Most of you watching may have some type of retirement account through your employer, and if you change jobs or leave that employer, you have a couple options to decide. One of your choices, and this is a choice that you should not take, is to take all of the money out of your company retirement account and the reason you don't want to do that is because you have to pay taxes on the whole thing and potentially a 10% penalty. So you absolutely don't want to do that, and yet a lot of people are. So in comes the rollover IRA, and what you're doing is you're taking your old company's retirement account and you're moving that into this IRA, into your own retirement account, and that's what's called a rollover. And the reason you're doing that is because the IRS says, if you move it directly from your company's retirement account to your own rollover IRA, you don't have to pay any taxes and you avoid any penalties. So it's a great way to keep your retirement savings intact, and to keep it growing for the future as you're saving for your retirement. Also keep in mind that once the money gets into the IRA, into the rollover IRA, you still have to make an investment decision with it to make sure that that money grows. But any time you change jobs, you want to make sure you preserve that tax deferred status of your retirement accounts and usually the best way to do that is by opening and using a rollover IRA.

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