A rollover IRA is simply a traditional IRA that holds money you moved from a former employer’s 401(k) or similar retirement plan. If you recently completed a rollover, your funds may be sitting in a default money market or settlement account, earning almost nothing. The most important next step is making sure that money is actually invested, not just parked. Beyond that, you have several strategic options worth considering depending on your age, income, and retirement timeline.
Check Whether Your Money Is Invested
This is the single most common oversight with rollover IRAs. When you transfer funds from a 401(k), the money often lands in a cash or money market holding account inside your IRA. It looks like the rollover worked because the balance is there, but the funds aren’t invested in anything that will grow meaningfully over time. Log into your brokerage account and look at your holdings. If the entire balance shows as “cash,” “core position,” or a money market fund, you need to choose investments.
How to Invest Rollover IRA Funds
You now have far more flexibility than you did inside a 401(k). Most employer plans limit you to a short menu of funds. An IRA at a major brokerage gives you access to thousands of mutual funds, exchange-traded funds (ETFs), individual stocks, and bonds. That freedom can feel overwhelming, but the core approach is straightforward.
For most people, a handful of low-cost index funds or ETFs is the simplest and most effective strategy. Index funds track a broad market benchmark like the S&P 500 or the total U.S. stock market, and they charge very low fees because they aren’t actively managed. You’d split your money between stock index funds and bond index funds based on how many years you have until retirement and how much volatility you can tolerate. A common starting point: subtract your age from 110, and put that percentage in stocks, the rest in bonds. Someone who is 40 might aim for roughly 70% stocks and 30% bonds.
If you had a target-date fund in your 401(k), you can buy a similar one inside your IRA. Target-date funds automatically shift from stocks toward bonds as you approach a chosen retirement year. They’re a single-fund solution that handles rebalancing for you, and the versions available through a brokerage are often cheaper than the ones offered inside 401(k) plans.
If you’d rather not pick investments yourself, a robo-advisor is another option. Robo-advisors use algorithms to build and rebalance a portfolio for you based on your age, goals, and risk tolerance. They typically charge an annual management fee of 0.25% to 0.50% of your balance, on top of the underlying fund fees. That’s more than doing it yourself with index funds, but far less than hiring a traditional financial advisor.
Consider a Roth Conversion
One of the most impactful moves you can make with a rollover IRA is converting some or all of it to a Roth IRA. In a traditional (rollover) IRA, your money grows tax-deferred, and you pay income tax when you withdraw it in retirement. In a Roth IRA, you pay tax now, but all future growth and withdrawals are tax-free.
The amount you convert counts as ordinary income in the year you do it. If you convert $50,000, that’s $50,000 added to your taxable income for the year. This means conversions work best in years when your income is lower than usual, such as a gap between jobs, early retirement before Social Security kicks in, or a year with unusually large deductions. Be careful about converting so much that you push yourself into a significantly higher tax bracket.
You don’t have to convert the entire account at once. Many people do partial conversions over several years to spread out the tax hit. You might convert $20,000 or $30,000 per year, staying within your current bracket. Once converted, a Roth IRA has no required minimum distributions during your lifetime, which gives you more control over your income in retirement and can be a major advantage for estate planning.
A few rules to know: conversions are permanent and cannot be reversed. If you’re at an age where you’re required to take minimum distributions, you must take that year’s distribution before converting. The deadline to complete a conversion for a given tax year is December 31.
Roll It Into a New Employer’s 401(k)
If you’ve started a new job, you may be able to roll your IRA funds into your new employer’s 401(k). Not every plan accepts incoming rollovers, so check with your plan administrator first. This move, sometimes called a “reverse rollover,” has a few specific advantages.
First, 401(k) plans are protected under federal law (ERISA), which provides strong creditor protection in bankruptcy. IRA protections vary and are generally less comprehensive. Second, if you leave your job at age 55 or later, a 401(k) lets you take penalty-free withdrawals under the “Rule of 55.” That exception applies to employer plans but not to IRAs, where you’d generally face a 10% early withdrawal penalty on distributions before age 59½.
Third, and this is important if you’re considering Roth conversions: moving pre-tax rollover IRA money into a 401(k) can simplify the tax math. When you have pre-tax money in any traditional IRA, a rule called the “pro-rata rule” requires you to treat conversions as coming proportionally from both pre-tax and after-tax dollars across all your traditional IRAs. By moving the pre-tax balance into a 401(k), you clear the path for cleaner Roth conversions of any after-tax IRA money you have.
Leave It Where It Is (but Stay Engaged)
There’s nothing wrong with keeping your rollover IRA right where it is, especially if it’s at a low-cost brokerage with good fund options. The key is to treat it like an active part of your retirement plan rather than forgetting about it. Review your investment allocation at least once a year, and rebalance if your stock-to-bond mix has drifted significantly from your target.
As you get closer to retirement, gradually shift toward a more conservative allocation. If you’re 25 years from retirement, a portfolio heavy in stock index funds makes sense because you have time to ride out downturns. If you’re five years out, you’ll want more in bonds and stable investments to protect what you’ve built.
Withdrawal Rules to Keep in Mind
A rollover IRA follows the same distribution rules as any traditional IRA. Withdrawals before age 59½ generally trigger a 10% early withdrawal penalty on top of regular income tax. There are exceptions: distributions due to disability, terminal illness, certain medical expenses exceeding a threshold, qualified birth or adoption expenses, and substantially equal periodic payments spread over your life expectancy, among others.
Once you reach the required age for minimum distributions (73 for people born between 1951 and 1959, and 75 for those born in 1960 or later), you must start taking annual withdrawals whether you need the money or not. The amount is calculated based on your account balance and life expectancy. Missing an RMD triggers a steep penalty. If you convert the account to a Roth IRA before reaching that age, you eliminate RMDs entirely during your lifetime.
Choosing the Right Brokerage
If your rollover IRA is at a brokerage with high fees, limited fund choices, or poor customer service, moving it to a better provider is simple and has no tax consequences. A trustee-to-trustee transfer between IRA custodians isn’t a taxable event. Look for a brokerage that offers commission-free trades, a wide selection of no-transaction-fee index funds, and low (or zero) account maintenance fees. The largest online brokerages all meet these criteria and charge no annual account fees for IRAs.
When comparing brokerages, pay attention to the expense ratios on the funds you plan to buy. An expense ratio is the annual fee a fund charges as a percentage of your investment. Broad stock index funds at major providers typically charge between 0.03% and 0.10% per year. On a $100,000 balance, the difference between a 0.03% fund and a 0.50% fund is roughly $470 a year, and that gap compounds over decades.