Have you ever wondered about the difference between an IRA and a rollover IRA? If so, stay tuned for the next episode of All About FERS. Hi, I'm John Raleigh, Certified Financial Planner with All About FERS, and today we're going to talk about financial terminology, and specifically the difference between IRAs and rollover IRAs. Now when discussing retirement assets words can make a big difference. The use of traditional IRA, or IRA for short, and rollover IRA
can cause some issues and confusion. Keep in the back of your mind that common sense and the way things need to be done are not always in agreement. It's easy to get confused between IRA and rollover IRA. So let's start by defining the term IRA. An IRA is an individual retirement account. It is a tax savings account that allows individuals to contribute and invest for their retirement. There are three main types of IRA accounts, the traditional IRA, the Roth IRA and the
rollover IRA. With the traditional IRA account, your contribution may be tax deductible, but your withdrawals in retirement are taxable to you. In the Roth IRA contributions are made with after tax dollars, but qualified
withdrawals in retirement are tax free to you. With a rollover IRA, your contributions may be tax deductible, and withdrawals in retirement will be taxable to you if you make contributions to your rollover IRA, you may make it difficult or impossible to move your rollover funds back into an employee sponsored retirement plan if you want in the future. Now, IRAs both traditional and rollover and Roth IRAs are different than your TSP or 401 K's, TSA, 403 B's and other employer sponsored
retirement plans. A rollover IRA is a type of traditional IRA. It's designed to receive funds from an employer sponsored retirement plan, such as a TSP, 401 K, TSA, 403 B. Now let's look at some of the other differences between these plans. One difference between IRAs and employee sponsored retirement plans is that employee sponsored retirement plans can have limited investment choices compared to IRAs or rollover
IRAs. Now let's take a look at some of the differences. One of the differences between an IRA and an employee sponsored retirement plan is that your employee sponsored retirement plan can have limited options in investment categories, compared to an IRA or a rollover IRA. A rollover IRA is funded by rolling over your money from your employee sponsored retirement plan, such as a TSP, 401 K, TSA, 403 B, while a traditional IRA is funded by personal contributions, and
that's a very important piece. There also are contribution limits and differences between the traditional IRA and the
rollover IRA. A traditional IRA will have an annual contribution limit of $7,000 in 2025 if you're under 50 years old, and 8000 if you're 50 years old or older, same limits are in place for the rollover IRA, you have an annual contribution limit of $7,000 in 2025 if you're under 50 years old, 8000 if you're 50 years old or older, with the rollover IRA, though you do not have a limit on the amount of money that can be rolled over from an employee sponsored retirement plan, and this is the
big difference between the two. Now the tax treatment is the same for traditional IRA and rollover IRAs, they grow tax deferred and withdrawals are taxable in retirement. Roth IRA is an exception. Contributions are not tax deductible, but
qualified withdrawals in retirement or tax free. The last big difference is with a rollover IRA, if you go to work to a new employer and that new employer's sponsored retirement plan allows this, you then can roll back or roll over your IRA back into your employer sponsored workplace plan, but only if that plan rules permit it, and that's a key piece. The feature is not available trying to roll it in from a traditional IRA for the employee sponsored retirement plan. As you can see,
this can get confusing pretty quickly. I hope this gives you a better insight into IRA and roll over IRAs and some of the terminology you might hear. This knowledge will help you have a better understanding and that it is important to use the correct terminology when you're dealing with these sort of investment vehicles. Thanks for stopping by All About FERS and until next time, Happy Planning!