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
*SEP and SIMPLE IRAs are not included in or subject to this limit and are fully protected under federal law if you declare bankruptcy.
Use this rollover guide to help you decide where you
can move your retirement dollars. 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:
- Required minimum distributions
- Certain annuity or installment payments
- Hardship withdrawals
- Corrective distributions of excess contributions and deferrals
In addition to rolling over the assets to an IRA or new employer's plan, or leaving the money in your current employer plan, you may also choose to take a lump-sum cash distribution. However, keep in mind that the distribution will be subject to income taxes and, if you're younger than 59½, a 10% penalty tax, unless an exception applies.
Retirement Account Rollovers
A rollover is the movement of funds from one
retirement savings vehicle to another. You may want 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 (or trustee-to-trustee transfer).
The indirect, or 60-day, rollover
With this method, you actually receive a distribution from
your retirement plan and then, to complete the transaction, you deposit the funds 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 the entire distribution amount (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 amount 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. You never actually receive the funds or have
control of them, so a trustee-to-trustee transfer is not treated as a
distribution. Direct rollovers 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 trustee-to-trustee transfer 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 consider a rollover?
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 consider a rollover to either an IRA or a new employer's plan?
There are pros and cons to each move.
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.
New employer's plan: On the other hand, employer-sponsored plans may offer better
creditor protection. In general, federal law protects IRA assets up
to $1,362,800 (scheduled to increase on April 1, 2022) — plus any amount rolled over from a qualified
employer plan or 403(b) plan — if bankruptcy is declared.* (The laws in your state may provide
additional protection.) In contrast, assets in a qualified employer plan or 403(b) plan
generally receive unlimited protection from creditors under federal law,
regardless of whether bankruptcy is declared.
1 Required distributions and nonspousal death
benefits can't be rolled over.
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
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
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).