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).
Schedule an Appointment
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 IRA?
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.
Another option is cashing out the funds from your plan. This is the least recommended option in retirement planning because of the immediate tax implications. All the money taken out as a cash distribution becomes taxable as income and if you are under 59 ½ an IRS 10 %premature distribution penalty tax will also be applied unless an exception applies.
When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.
Use this rollover guide to help you decide where you can move your retirement dollars. Remember all these rollover types each has its rules, so be sure your assets are compliant so that you can benefit from the tax advantages, and not be subject to paying penalties. A financial professional can also help you navigate the rollover waters. Keep in mind that employer plans are not legally required to accept rollovers. Review your plan document.
Some distributions can't be rolled over, including:
1 Required distributions and nonspousal death benefits can't be rolled over.2 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 earnings.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 rolled over.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).*SEP and SIMPLE IRAs are not included in or subject to this limit and are fully protected under federal law if you declare bankruptcy.