The 26-year-old, who made just six league appearances last season for the Tractor Boys, has signed a two-year deal with the Millers after initially being transfer listed by Mick McCarthy.
Despite having another year remaining on his contract, Loach was allowed to exit Portman Road as a free agent and he has become Steve Evans' third summer signing alongside Conor Newton and Matt Derbyshire.
Loach will compete with Adam Collin - Rotherham's play-off final hero in the penalty shoot-out win over Leyton Orient - for the number one jersey and Evans believes he will provide another strong option.
"Scott has made over 150 starts for Watford in the Championship so he has great experience at this level," he told Rotherham's official website.
"He has played under the likes of the excellent Malky Mackay and Brendan Rodgers and they are two individuals who know a player when they see one.
"He has just turned 26 so he is at a good age. He has previously been called up to the England senior squad and has been capped repeatedly at under-21 level.
"He has great stature, he kicks well, he has all the attributes that a top keeper needs and he fits in perfectly to what we are looking for.
"Similar to Matt Derbyshire and Conor Newton we are signing a player who is still young, still has a point to prove and is hungry for success.
"He had a dream move to Ipswich, his boyhood club, for a sizeable undisclosed fee but it hasn't quite worked out as he would have wished.
"We are delighted to sign Scott, like our other signings, he has a fantastic pedigree and he wants to help take this club and his career forward."