How Many Times Can You Rollover a 401(k)?

A 401(k) rollover allows individuals to move retirement savings from one qualified retirement plan to another. This process helps maintain the tax-deferred status of funds, preventing immediate taxation and potential penalties. Understanding the specific rules governing these transfers is important for managing retirement assets effectively. Proper execution of a rollover ensures that accumulated savings continue to grow without interruption or unexpected tax liabilities.

Types of 401(k) Rollovers

Two primary methods exist for transferring funds from a 401(k) plan: direct rollovers and indirect rollovers. The choice between these methods impacts the handling of funds and potential tax implications, while adhering to Internal Revenue Service (IRS) guidelines.

A direct rollover, often referred to as a trustee-to-trustee transfer, involves the direct movement of funds from the old plan administrator to the new one. In this scenario, the funds never pass through the account holder’s hands, which helps avoid tax complications and mandatory withholding. This method is generally considered the most straightforward way to transfer retirement savings.

Conversely, an indirect rollover, also known as a 60-day rollover, means the funds are first distributed to the account holder. Once received, the individual has 60 calendar days to deposit the entire amount into another qualified retirement account to avoid income taxes and penalties. A significant aspect of indirect 401(k) rollovers is the mandatory 20% federal income tax withholding by the distributing plan, even if the intention is to roll over the full amount. This 20% must be replaced from other personal funds if the goal is to roll over the full gross amount.

The 60-day period for an indirect rollover is a strict deadline for completing the transfer. If the funds are not redeposited within this timeframe, the distribution becomes taxable income. Additionally, if the account holder is under age 59½, a 10% early withdrawal penalty may apply to the untransferred amount.

Rules on Rollover Frequency

The frequency of 401(k) rollovers is governed by specific IRS regulations, which differentiate between direct transfers and indirect movements of funds. Understanding these distinctions is important to ensure compliance and avoid unintended tax consequences.

For direct rollovers from a 401(k) plan to another 401(k) plan or to an Individual Retirement Account (IRA), there is generally no limit on the number of times an individual can perform such a transfer. The IRS does not impose a frequency restriction on these direct movements of funds between qualified plans, allowing flexibility in consolidating or moving retirement assets.

Indirect 401(k) rollovers, while subject to the 60-day completion rule, do not have a frequency limit on how many different 401(k) plans can be indirectly rolled over into an IRA or another qualified plan within a year. Multiple such transactions are permissible, as long as each indirect rollover is completed within its respective 60-day window.

A distinct rule, however, applies to indirect rollovers between IRAs, known as the “one-rollover-per-year” rule. This rule, detailed in IRS Publication 590-A, states that an individual can only make one indirect (60-day) rollover from any of their IRAs to any other of their IRAs within a 12-month period. This limit aggregates all of an individual’s IRAs, including traditional, Roth, SEP, and SIMPLE IRAs, treating them as one for the purpose of this rule.

It is important to note that the “one-rollover-per-year” rule for IRAs does not apply to all types of transfers. It specifically excludes direct transfers (trustee-to-trustee transfers) between IRAs, rollovers from employer-sponsored plans (like 401(k)s) to IRAs, and Roth conversions. For example, an individual could perform a direct rollover from a 401(k) to an IRA, and then later in the same year, conduct a direct trustee-to-trustee transfer between two IRAs, without violating the one-rollover-per-year rule.

Executing a 401(k) Rollover

Initiating a 401(k) rollover involves a series of practical steps to ensure the tax-advantaged status of retirement savings is maintained. The process typically begins by contacting the administrator of the old 401(k) plan.

Before contacting the old plan, it is helpful to have determined the destination for the rollover funds. Common destinations include a new employer’s 401(k) plan or a personal Traditional or Roth IRA. The chosen receiving institution or plan administrator will also need to be contacted to obtain their specific requirements for accepting the rollover.

Documentation is a significant part of the rollover process. The old 401(k) plan administrator will issue IRS Form 1099-R, which reports the distribution amount. For direct rollovers, this form typically indicates a non-taxable event. If rolling into an IRA, the receiving institution will later issue Form 5498, confirming the rollover contribution.

For an indirect rollover, where the funds are received by the individual, careful attention to the 60-day window is essential. Upon receiving the check, it must be deposited into the new qualified account within 60 calendar days from the date of receipt. If the distributing plan withheld 20% for taxes, the individual must contribute additional personal funds to cover this withheld amount to roll over the full gross distribution.

Tax reporting for rollovers is completed on IRS Form 1040. The gross distribution amount from Form 1099-R is reported on the appropriate line. To indicate that the distribution was rolled over and is not taxable, a ‘0’ is typically entered in the taxable amount box, and “Rollover” is written next to the line. The IRS cross-references the reported information with Forms 1099-R and 5498 to verify the rollover’s tax-free status.