What is Rollover?

A rollover is the process of transferring funds from one tax-advantaged retirement account, such as an employer-sponsored 401(k) or 403(b), to another qualifying retirement account, such as an Individual Retirement Account (IRA) or a new employer's retirement plan. Rollovers are most commonly performed when an employee changes jobs or retires. When executed correctly, a rollover allows the investor to consolidate their accounts, gain access to a broader range of investment options, and maintain the tax-advantaged status of their savings without triggering income taxes or early withdrawal penalties.

Rollovers are categorized into two primary types, each subject to different IRS rules: direct rollovers and indirect rollovers. A direct rollover (also known as a trustee-to-trustee transfer) is the safest method. Here, the funds are transferred directly between financial institutions, bypassing the participant's personal bank account entirely. Because the participant never takes possession of the cash, no taxes are withheld. In contrast, an indirect rollover involves the custodian distributing the funds directly to the participant, who then has exactly 60 calendar days from the date of receipt to deposit those funds into a new qualifying retirement account.

Under IRS rules, indirect rollovers from employer-sponsored plans are subject to a mandatory 20% federal income tax withholding. This means that if an employee rolls over $10,000 indirectly, they will only receive a check for $8,000. To complete the rollover and avoid taxes and early withdrawal penalties on the withheld amount, the participant must deposit the full $10,000 into their new account within 60 days, replacing the missing $2,000 out-of-pocket. Additionally, the IRS enforces a strict 'one-rollover-per-year' limit on indirect IRA-to-IRA transfers, though this limit does not apply to direct trustee-to-trustee transfers or rollovers from employer plans to an IRA.