What Is a Rollover Distribution? How the Process Works

A rollover distribution moves funds from one retirement account to another without triggering a taxable event, maintaining the tax-deferred status of your savings. People use rollovers when changing jobs, retiring, or consolidating accounts to continue growing their investments without immediate income taxes or early withdrawal penalties.

Direct vs Indirect Rollovers

You can move retirement funds using either a direct or an indirect rollover. A direct rollover is a transfer where your old financial institution sends the money directly to your new retirement account provider. Because you never personally receive the funds, this method simplifies the process and avoids potential tax complications.

In an indirect rollover, you take temporary possession of the funds. The plan administrator issues a check payable to you, and you have 60 days to deposit the money into a new retirement account. If you miss this deadline, the entire amount becomes a taxable distribution and may be subject to a 10% early withdrawal penalty if you are under age 59 ½.

A complication with indirect rollovers from employer plans like a 401(k) is the mandatory 20% federal tax withholding sent to the IRS. For example, on a $50,000 rollover, your old plan sends you a check for $40,000 and $10,000 to the IRS. To avoid taxes on the withheld amount, you must deposit the full $50,000 into the new account within 60 days, which requires using $10,000 of your own money.

You can reclaim the $10,000 withholding when you file your annual income tax return. If you only deposit the $40,000 you received, the withheld $10,000 is treated as a taxable distribution and may incur the 10% early withdrawal penalty. The IRS also limits you to one indirect IRA-to-IRA rollover in any 12-month period.

Permitted Rollover Transactions

The IRS provides specific guidelines on which accounts can be rolled into others, ensuring that assets maintain their tax-advantaged status when moved correctly. The compatibility between different plan types dictates the available pathways for consolidating or transferring your funds.

Common transactions include moving funds from an employer plan like a 401(k) into a Traditional IRA, which is often done after leaving a job. You can also transfer funds between Traditional IRAs to change providers or from a former employer’s 401(k) into a new employer’s 401(k), if the new plan accepts them.

Roth accounts have their own rules. Funds from a Roth 401(k) can be rolled into a Roth IRA, preserving tax-free growth and withdrawals. It is also possible to roll over funds from a 529 college savings plan to a Roth IRA under certain conditions.

A Roth conversion is a specific type of rollover where pre-tax money from a Traditional IRA or 401(k) is moved into a Roth IRA. This transaction is a taxable event. You must report the converted amount as ordinary income on your tax return for that year.

Other accounts, like SIMPLE IRAs, have specific regulations. For instance, you must generally wait two years from your first contribution before rolling a SIMPLE IRA to a non-SIMPLE IRA. For detailed rules on all permissible rollovers, the IRS provides a comprehensive chart on its website.

Required Information and Documentation

To initiate a rollover, you must first gather the required information and documentation for both your old and new accounts.

You will need to provide the following details:

• Your full name, address, and Social Security number
• The account number for your old retirement plan
• The account number for the new receiving account
• The legal name and mailing address of both financial institutions

The process involves completing forms from both institutions, such as a “Distribution Request Form” from your old plan and a “Rollover Contribution Form” for your new account. These documents are usually available on the financial institutions’ websites. You will use the information you gathered to complete these forms, designating the new institution as the destination for a direct rollover.

Initiating the Rollover Request

After completing the required forms, you can submit the request. Depending on the institution, this can be done through an online portal or by mailing the physical paperwork.

The transfer is usually processed within 7 to 14 business days, with the old plan administrator either wiring the funds or mailing a check. You should receive confirmation from both institutions once the transaction is complete. Log in to your new account to verify the funds have arrived and are invested correctly.

For any rollover, the transaction will be reported to the IRS by the distributing institution on Form 1099-R. You must also properly report the rollover on your Form 1040 tax return to ensure it is not treated as a taxable event.