Rollover

Moving money from one retirement account to another, such as from an old 401(k) to an IRA, without triggering taxes or penalties if done correctly.

What it means

A rollover transfers retirement savings between eligible accounts, most often when someone leaves a job. In a direct rollover, the old plan sends the money straight to the new account, and nothing is withheld. In an indirect rollover, the account owner receives the money and must deposit it into the new account within 60 days.

Indirect rollovers carry pitfalls. Employer plans must withhold 20% for federal tax, so the owner has to make up that amount from other funds to roll over the full balance. Any amount not redeposited in time is taxable and may face the 10% additional tax. Indirect IRA-to-IRA rollovers are also limited to one per 12 months.

Example

Suppose someone leaving a job has $50,000 in a 401(k) and takes a check. The plan withholds 20%, so they receive $40,000. To avoid tax on the missing $10,000, they must deposit the full $50,000 into an IRA within 60 days, using $10,000 of their own money, and get the withholding back at tax time.

How it’s used

Changing jobs or retiring
Consolidating several old accounts
Gaining wider investment choices in an IRA

Strengths and weaknesses

Strengths

Consolidates accounts for easier management
An IRA often offers wider, cheaper investment choices
A direct rollover avoids withholding and tax

Weaknesses

Indirect rollovers risk tax and penalties if the deadline is missed
Employer plans may offer protections or low-cost funds an IRA lacks
Rolling pre-tax money into a Roth account is a taxable conversion

Good to know

Requesting a direct, trustee-to-trustee transfer avoids the 20% withholding and the 60-day clock.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.