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What is an IRA Rollover?

A rollover is a tax-free distribution of cash or other assets from one retirement plan which is then reinvested in another retirement plan.  The contribution to the second retirement plan is called a "rollover contribution."

In general, the following types of plans allow rollovers:

  • A traditional IRA
  • An employer’s qualified retirement plan for its employees
  • A Section 457(b) eligible governmental pan
  • A Section 403(b) plan
  • A Roth IRA (very limited - see IRS Publication 590)
  • A designated Roth Account within a plan (limited - see IRS Publication 590)

Reasons for Rollovers

When a participant takes a distribution (other than qualified Roth distributions or after-tax distributions), it is not only subject to current income tax, it may be subject to a 10% IRS penalty if the participant is under age 59½. Furthermore, if a participant under age 55 receives a distribution upon leaving employment, the 10% penalty tax may also apply. However, when a participant rolls a distribution over, the income tax is deferred, so the assets can continue to grow tax deferred.

Distributions from a SIMPLE IRA within the first two years of participation will be subject to a 25% additional tax.

Most workers will have four options for their retirement plan assets when they leave an employer:

  1. Leave the assets in the prior employer’s plan
  2. Roll the assets to a new employer’s plan (if continuing to work and plan is available)
  3. Roll the assets to an IRA
  4. Cash out the retirement savings

Determining which option is best can be challenging for individuals.  There is no “one size fits all” solution.  The best choice will vary depending upon an individual’s unique financial needs and savings objectives.

Many workers have chosen to roll over their savings from their prior employer’s plan into an IRA.  IRAs currently hold $7.3 trillion, representing a substantial portion of overall retirement savings in the U.S.  Rollovers from employer plans are the most significant source of dollars flowing into IRAs.  But, an IRA rollover is not the only option and it may not be the best choice for a particular individual.  Regulatory agencies, including the Financial Industry Regulatory Authority (FINRA), the regulatory agency that oversees broker dealers, have emphasized how important it is for workers to understand all of their options and evaluate multiple variables when deciding whether to roll assets to an IRA.

The IRA Rollover Guide

The objective of the IRA Rollover Guide is to provide foundational education regarding how and when assets can be rolled among retirement arrangements. The Guide will highlight some of the variables that should be considered when evaluating the four distribution options and will describe the tax rules that apply to rollover transactions. The Guide also contains a Glossary of Terms (Appendix A) defining many of the common technical terms individuals may encounter as they explore IRA rollover options.

As with any important financial decision, an individual is often well served by seeking professional assistance. Financial advisors with investment expertise, as well as tax and legal advisers, can provide valuable support to individuals who want to learn more about IRA rollovers.