What is a Rollover?

Often in the financial industry a term is used so often that it seeps into the vocabulary of the general public.  When financial professionals hear someone mention a term such as “rollover” they need to be careful in assuming the individual knows all the intricacies associated with it. 

Rollover is a term that has been generically attached to the process of moving retirement dollars from one location to the next.  Below we hope to clarify the differences in the terms often lumped into the same category.  Failure in understanding the differences can often lead to unintended adverse consequences.

Direct Rollover

Moving money from an employer-sponsored retirement plan (e.g. 401(k)) directly to an IRA or a new employer’s plan.

With this process the administrator of your old employer’s retirement plan will cut a check to your new employer’s plan or to your IRA’s trustee for your benefit.  Even though a 1099-R tax form will be generated there should it will code the distribution as a direct rollover which is not a taxable event.

Trustee-to-trustee transfer

A non-taxable transfer of your IRA assets from one trustee/custodian to another.

This action is often referred to incorrectly as a rollover.  With a trustee-to-trustee transfer there are no tax forms generated and there are no limits to how often you can much such a transfer.

Rollover

Taking receipt of retirement plan or IRA dollars and then depositing into another retirement plan or IRA within a 60-day period.

This type of rollover in most cases is not advisable for a number of reasons:

 

  1. If the money comes from an employer plan that employer is required to withhold 20% for taxes.  You would have to come up with the withheld amount and add that to your rollover to avoid being taxed and penalized (if you are under the age of 59.5)
  2. Rollovers of specific assets are limited to once every year (365 days).
  3. As a general rule it is never a good idea to have the 60-day clock start ticking.  Too many things can happen such as a delay in processing your paperwork/check.
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