In general, a rollover is the movement of funds from one
retirement savings vehicle to another. You may want, or need, to make a
rollover for any number of reasons — your employment situation has changed, you
want to switch investments, or you've received death benefits from your
spouse's retirement plan.
There are two possible ways that retirement funds can
be rolled over — the indirect (60-day) rollover and the direct rollover (trustee-to-trustee transfer).
The indirect, or 60-day, rollover
With this method, you actually receive a distribution from
your retirement plan and then, to complete the rollover transaction, you make a
deposit into the new retirement plan account or IRA. You
can make a rollover at any age, but there are specific rules that must be
followed. Most importantly, you must generally complete the rollover within 60
days of the date the funds are paid from the distributing plan.
If properly completed, rollovers aren't subject to income
tax. But if you fail to complete the rollover or miss the 60-day deadline, all
or part of your distribution may be taxed, and subject to a 10% early
distribution penalty (unless you're age 59½ or another exception applies).
Further, if you receive a distribution from an employer
retirement plan, your employer must withhold 20% of the payment for taxes. This
means that if you want to roll over your entire distribution (and avoid taxes and possible penalties on the amount withheld), you'll need to
come up with that extra 20% from other funds (you'll be able to recover
the withheld taxes when you file your tax return).
The direct rollover, or trustee-to-trustee transfer
The second type of rollover transaction occurs directly
between the trustee or custodian of your old retirement plan, and the trustee
or custodian of your new plan or IRA. It is often referred to as a direct rollover. You never actually receive the funds or have
control of them, so a trustee-to-trustee transfer is not treated as a
distribution. Trustee-to-trustee transfers avoid both the danger of missing the
60-day deadline and the 20% withholding problem.
If you stand to receive a
distribution from your employer's plan that's eligible for rollover, your
employer must give you the option of making a direct rollover to another
employer plan or IRA.
A direct rollover is generally
the most efficient way to move retirement funds. Taking a distribution
yourself and rolling it over may make sense only if you need to use the funds
temporarily, and are certain you can roll over the full amount within 60 days.
Should you roll over money from an employer plan to an
In general, if your vested balance is more than $5,000 you can keep your money in an employer's plan
at least until you reach the plan's normal retirement age (typically age 65). But if you
terminate employment before then, should you keep your money in the plan (or roll it into your new employer's plan) or
instead roll it over to an IRA?
There are several reasons to consider a rollover. In
contrast to an employer plan, where investment options are typically limited to
those selected by the employer, the universe of IRA investments is almost
unlimited. Similarly, the distribution options in an IRA (especially for your
beneficiary following your death) may be more flexible than the options
available in your employer's plan.
On the other hand, your employer's plan may offer better
creditor protection. In general, federal law protects your total IRA assets up
to $1,283,025 (as of April 1, 2016) — plus any amount you roll over from a qualified
employer plan or 403(b) plan — if you declare bankruptcy.* (The laws in your state may provide
additional protection.) In contrast, assets in a qualified employer plan or 403(b) plan
generally enjoy unlimited protection from creditors under federal law,
regardless of whether you've declared bankruptcy.
1 Required distributions and nonspousal death
benefits can't be rolled over.
In general, you can make only one tax-free, 60-day, rollover from one IRA to another IRA in any 12-month period no matter how many IRAs (traditional, Roth, SEP, and SIMPLE) you own. This does not apply to direct (trustee-to-trustee) transfers, or Roth IRA conversions.
3 Taxable conversion
4 Nontaxable conversion
5 Only after employee has participated in SIMPLE
IRA plan for two years.
6 Required distributions, certain periodic
payments, hardship distributions, corrective distributions, and certain other
payments cannot be rolled over; nonspousal death benefits can be rolled over
only to an inherited IRA, and only in a direct rollover.
7 May result in loss of qualified plan lump-sum
averaging and capital gain treatment.
8 Direct (trustee-to-trustee) rollover only;
receiving plan must separately account for the after-tax contributions and
9 457(b) plan must separately account for
rollover--10% penalty on payout may apply.
10 Nontaxable dollars may be transferred only in
a direct (trustee-to-trustee) rollover.
11 Taxable dollars included in income in the year
12 401(k), 403(b), and 457(b) plans can also allow participants to directly transfer non-Roth funds to a Roth account if certain requirements are met (taxable conversion).