Rollover Distribution: What It Is and How to Do One

A rollover distribution is the movement of funds from one retirement account to another. This is often done after a change in employment to maintain the tax-deferred status of retirement savings, consolidate assets, or move to an account with different investment options or features.

Understanding Rollover Types and Rules

There are two methods for executing a rollover: direct or indirect. In a direct rollover, the financial institution holding your funds transfers the money directly to the new retirement account. You never take possession of the funds, and this method avoids potential tax complications.

An indirect rollover is when you receive a check for the value of your retirement account and are responsible for depositing it into a new one. This must be completed within a 60-day window from the date you receive the distribution. Failing to meet this deadline means the amount could be treated as a taxable distribution, subject to income taxes and a 10% early withdrawal penalty if you are under age 59 ½.

Indirect rollovers from an employer-sponsored plan, such as a 401(k), have a mandatory 20% federal income tax withholding. The plan administrator is required to withhold this amount before sending you the check. For example, if your distribution is $20,000, you will receive a check for $16,000. To complete a full rollover, you must deposit the entire $20,000, using $4,000 of your own money to cover the withholding, which you can reclaim when you file your annual tax return.

The IRS allows for a waiver of the 60-day rule under specific circumstances. For IRAs, you are limited to one indirect rollover per 12-month period. This limitation does not apply to direct rollovers.

Permitted Rollover Transactions

There are several common pathways for moving retirement funds between different types of accounts. Each pathway has its own set of rules and considerations to ensure the transaction maintains its tax-advantaged status.

Employer Plan to an IRA

A frequent transaction is rolling over funds from an employer-sponsored plan, like a 401(k) or 403(b), into a Traditional IRA. This is often done when an individual leaves a job to consolidate retirement savings or gain access to a wider range of investment options.

Employer Plan to another Employer Plan

It is also possible to roll over funds from a previous employer’s 401(k) into a new employer’s 401(k), if the new plan accepts such rollovers. This can be a convenient way to keep all retirement savings in one place. This type of transfer is handled as a direct rollover.

IRA to another IRA

You can move funds from one Traditional IRA to another. This is considered a transfer, not a rollover, if the funds are moved directly from one financial institution to another. These IRA-to-IRA transfers are not reportable to the IRS and there is no limit to how many you can perform in a year.

Roth Conversions

A Roth conversion is a specific type of rollover where you move funds from a traditional, pre-tax retirement account to a Roth account. This transaction is a taxable event, and you must report the amount rolled over as taxable income in the year of the conversion. The benefit is that qualified withdrawals from the Roth IRA in the future will be tax-free.

Inherited Account Rollovers

The rules for rolling over an inherited retirement account depend on the beneficiary’s relationship to the original account owner. A surviving spouse has the most flexibility and can roll over the inherited assets into their own IRA. Non-spouse beneficiaries have more restrictive options and must execute a direct rollover into a specially titled “inherited IRA.”

Information and Documentation for a Rollover

You will need your Social Security number, date of birth, and current mailing address. You will also need the account number for the existing retirement plan you are moving funds from.

You will also need the details for the new account where the funds will be deposited. This includes the name of the financial institution, the new account number, and any specific instructions required by the receiving institution for accepting a rollover.

The distributing institution will require you to complete a “Rollover Distribution Request Form,” which can be found on the plan administrator’s website or requested from customer service. On this form, you will provide your personal information and specify the rollover type. For a direct rollover, you must also provide the detailed information for the new receiving account.

The Rollover Process

Once you have the necessary forms, submit the documentation to your old plan administrator through their online portal, by mail, or via fax. For a direct rollover, the administrator will send the funds to the new financial institution after processing your request. You should monitor your new account, as the funds may take from a few business days to a couple of weeks to appear.

If you choose an indirect rollover, the plan administrator will send you a check for the distribution. You must then deposit the funds into your new retirement account within the 60-day window. To complete a full rollover from an employer plan, you will also need to deposit personal funds to make up for the mandatory tax withholding.

After the rollover is complete, you will receive tax forms to report the transaction on your federal tax return. The administrator of the old plan sends Form 1099-R to report the distribution. The custodian of your new account sends Form 5498 to report the rollover contribution.