Rollovers from Retirement Plans

In General

If you withdraw cash or other assets from an employer-sponsored retirement plan ("employer plan") in an "eligible rollover distribution," (defined below) you can defer paying tax on the distribution by rolling all or part of it over to another employer plan or to a traditional IRA. You don't include the amount rolled over in your income until you receive it in a distribution from the recipient plan or IRA.

You can also roll all or part of your distribution to a Roth IRA. You'll pay income tax on the taxable portion of your distribution at the time of the rollover, but qualified distributions from the Roth IRA are free from federal income taxes.

Caution: Special rules apply to distributions from designated Roth 401(k), Roth 403(b), and Roth 457(b) accounts. See "Roth Accounts and Roth IRAs" below.

Rollovers from employer plans generally take one of four forms:

1. A transfer from your employer plan directly to an IRA trustee/custodian (this is a type of direct rollover)
2. A transfer from your employer plan to you, and then, within 60 days, from you to an IRA trustee/custodian (this is a type of indirect rollover)
3. A transfer from your employer plan directly to the trustee of the retirement plan at a new employer (this is a type of direct rollover)
4. A transfer from your employer plan to you, and then from you to the trustee of a retirement plan at a new employer (this is a type of indirect rollover)

Tip: Eligible rollover distributions are typically paid from defined contribution plans. A defined contribution plan is a retirement plan in which contributions are based on a set formula (e.g., a percentage of the employee's pre-tax compensation), while the payout is based on total contributions and investment performance. The 401(k) plan is the most common type of defined contribution plan. However, you may also roll over a distribution you receive from a defined benefit plan if the distribution qualifies as an eligible rollover distribution.

Caution: If you were born before 1936, and you receive a lump sum distribution from your employer plan, your distribution may be eligible for special tax treatment that may be lost if you roll all or part of your distribution over to an IRA. Consult a tax professional.

Caution: Special rules may apply to employer plan distributions received by qualified individuals who are affected by certain presidentially declared natural disasters, and repayment of qualified reservist distributions.

What Is An Eligible Rollover Distribution?

An "eligible rollover distribution" is a distribution of all or part of your account balance in an employer plan, except:

1. Required minimum distributions
2. Hardship withdrawals
3. Certain periodic payments. You cannot roll over any of a series of substantially equal distributions paid at least once a year over:

• Your lifetime or life expectancy
• The joint lives or life expectancies of you and your beneficiary, or
• A period of 10 years or more

4. Corrective distributions of excess contributions, excess deferrals, or excess annual additions (and any income allocable to these distributions)
5. An employer plan loan that has been treated as a distribution because it exceeds the allowable loan limit, that's in default due to missed payments, or that fails to satisfy certain other requirements
6. Dividends on employer securities
7. The cost of life insurance coverage paid by the plan
8. Contributions made under special automatic enrollment rules that are withdrawn pursuant to your request within 90 days of enrollment

Tip: Both in-service withdrawals and distributions following termination of employment may be rolled over if the distribution qualifies as an eligible rollover distribution.

Tip: If your distribution is an eligible rollover distribution, your plan administrator must send you a timely notice [a "402(f) notice"] explaining the rollover rules, the withholding rules, and other related tax issues.

Caution: Special rollover rules apply to the nontaxable portion of your eligible rollover distribution (for example, amounts attributable to your non-Roth after-tax contributions). See "Rollover of nontaxable amounts," below.

Which Plans Must Allow Rollovers?

Certain employer plans must allow you to make a direct rollover from the plan. These are:

• Qualified employer-sponsored retirement plans [for example, 401(k) and profit-sharing plans]
• Qualified Section 403(a) annuities
• Section 403(b) plans
• Governmental Section 457(b) plans

You may also make indirect rollovers of distributions from these plans. For purposes of this article, when we refer to "employer plans" or "employer-sponsored retirement plans," we are referring to the plans listed above.

Tip: While simplified employee pension plans (SEPs) and SIMPLE IRA plans are employer-sponsored plans, they are IRA based, and rollovers of distributions from those plans are generally governed by the rules applicable to rollovers from traditional IRAs.

Caution: While an employer plan generally must allow direct rollovers to be made from the plan, it does not have to allow rollovers to be made into the plan. If you want to make a rollover into a new employer plan, check with the plan administrator to determine if your new plan accepts rollovers.

Caution: An employer plan does not have to allow you to make a direct rollover to certain defined benefit plans. However, you can make an indirect rollover if the defined benefit plan accepts rollovers.

Which Plans Can Receive Rollovers?

In general, you can roll over a distribution from an employer plan into an "eligible retirement plan." An eligible retirement plan is an employer plan, a traditional IRA, or a Roth IRA.

Caution: During the first two years of participation in a SIMPLE IRA plan, you may roll over amounts from another SIMPLE IRA. After two years, you may also roll over amounts from a qualified retirement plan or an IRA.

Caution: Distributions from governmental Section 457(b) plans are generally not subject to the 10% premature distribution tax. A Section 457(b) plan can receive a rollover from a plan that is subject to the 10% penalty tax only if the Section 457(b) plan agrees to separately account for that rollover. This is because the amount rolled over, and any allocable earnings, will continue to be subject to the 10% penalty upon distribution from the Section 457(b) plan (unless an exception applies at the time of payout).

Caution: An employer plan is not required to allow rollovers into the plan. In addition, if your retirement plan distribution includes assets other than cash (such as employer securities), your IRA trustee or the new plan trustee may, but isn't required to, accept those assets as part of a rollover.

Tip: Special rules apply to distributions from designated Roth 401(k)/403(b)/457(b) accounts. In general, distributions from these accounts can only be rolled over to a Roth IRA, or to another designated Roth account. See "Roth Accounts and Roth IRAs," below.

Are Partial Rollovers Permitted?

Yes. However, only the portion that is rolled over qualifies as an income-tax-free transfer of funds. The remainder that is distributed to you is treated as a taxable distribution, subject to federal (and possibly state) income tax and perhaps a premature distribution tax penalty if you are under age 59½ (unless an exception applies).

Rollover of Nontaxable Amounts

You can roll over the nontaxable portion of an eligible rollover distribution (generally, your after-tax contributions), subject to some special rules:

• You cannot roll over the nontaxable portion of your distribution to a governmental Section 457(b) plan.
• You can roll over nontaxable dollars from one employer plan to another employer plan only in a direct rollover (not a 60-day rollover). However, you can roll over nontaxable dollars to an IRA in a direct or indirect rollover.
• You can roll over nontaxable dollars to an employer plan only if the receiving plan agrees to separately account for the nontaxable dollars and earnings.

In Notice 2014-54 (and related proposed regulations), the IRS clarified that employer-plan distributions can be split into more than one retirement vehicle with, for example, pre-tax money transferred directly to a traditional IRA (with no current tax liability) and after-tax money moved directly to a Roth IRA (with no conversion tax), or paid to you in a tax-free distribution.

The Notice provides the following technical rules:

• When calculating the taxable portion of a distribution from a 401(k) plan, all distributions you receive at the same time are treated as a single distribution, even if the proceeds are going to multiple destinations. This is important for allocating pre-tax and after-tax contributions to a distribution. For example, assume your 401(k) account is $100,000, consisting of $60,000 (6/10s) of pre-tax dollars and $40,000 (4/10s) of after-tax dollars. You request that $20,000 be rolled directly over to a traditional IRA and $20,000 paid to you. This is treated as a single $40,000 distribution from the 401(k) plan. Of this $40,000, $24,000 (6/10s) is pre-tax dollars, and $16,000 (4/10s) is after-tax dollars.

• If you receive a distribution (as defined above), and roll all or part of the distribution over to one or more eligible retirement plans, your pre-tax dollars will be deemed allocated first to any direct rollovers you make, and then to any 60-day (indirect) rollovers you make. After all your pre-tax dollars have been so allocated, any remaining amounts rolled over will consist of after-tax dollars. In the example above, $20,000 of the $24,000 of pre-tax dollars will first be allocated to the nontaxable rollover to the traditional IRA. The $20,000 paid to you will consist of the remaining $4,000 of pre-tax dollars (taxable to you) and the $16,000 of after-tax dollars (nontaxable).
• If you are making direct rollovers to more than one eligible retirement plan (or indirect rollovers to more than one plan), you can direct the trustee how to allocate the pre-tax dollars among those retirement plans prior to the time the direct rollovers are made.

Technical Note:

A special rule may apply if you made after-tax contributions to an employer plan before 1987, the plan separately accounted for them and the plan permits withdrawals from this account. You can request a withdrawal or rollover from your plan that consists of only these nontaxable after-tax contributions and no taxable earnings (that is, the pro-rata rule does not apply). For example, you could request a rollover of only these pre'87 after-tax contributions (and no earnings) to a Roth IRA and not have to include any portion of the rollover in your gross income.

An employer plan can also treat after-tax contributions you've made after 1986, and any earnings on those contributions, as a "separate contract" when determining the tax consequences of a distribution from the plan. If the plan contains this provision, then any distribution of employer contributions and earnings may be taxed separately from any distribution of employee after-tax contributions and earnings. Consult your plan administrator for more details.

Who Can Make A Rollover?

In addition to the plan participant, other plan payees may, in certain cases, be able to roll over distributions from employer plans: Qualified domestic relations order (QDRO) payee. If you are the plan participant's spouse or former spouse, you may be able to roll over all or part of an eligible rollover distribution from an employer plan that you receive under a QDRO. The rollover rules apply to you as if you were the participant. You can roll over the distribution into another employer plan, a traditional IRA, or (if you qualify based on your income and marital status) a Roth IRA.

Surviving spouse beneficiary. You may be able to roll over all or part of an eligible rollover distribution from an employer plan that you receive as the surviving spouse of a deceased participant. The rollover rules apply to you as if you were the participant. You can roll over the distribution into another employer plan, a traditional IRA, a Roth IRA.

Nonspouse beneficiary. If you are a designated beneficiary, but not the surviving spouse, of a deceased participant, you may be able to roll over all or part of an eligible rollover distribution you receive from an employer plan to a traditional IRA or to a Roth IRA. The distribution must be a direct rollover to an IRA that you set up to receive the distribution — indirect (60-day) rollovers are not permitted. The transfer will be treated as an eligible rollover distribution and the receiving IRA will be treated as an inherited IRA. This means that you cannot make any new contributions to the inherited IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as the beneficiary (that is, the new IRA is also set up as an inherited IRA).

Direct Rollovers vs. Indirect Rollovers

Once you decide to roll over your employer plan assets, you need to decide how the transfer will be made. Rollovers can be direct rollovers or indirect rollovers. The distinction is important because indirect rollovers can cost you a lot of money in some cases. A direct rollover is usually a better option. And in some cases, a direct rollover is the only option.

Direct Rollovers

You can choose to have all or part of an eligible rollover distribution paid directly to another employer plan that accepts rollover distributions, to a traditional IRA, or (if you qualify) to a Roth IRA. Generally, you will want to arrange for a direct rollover rather than an indirect rollover when your employer plan assets are moving to either another employer's retirement plan or an IRA. As the name suggests, a direct rollover involves arranging for the transfer of your retirement plan assets directly from the old plan trustee to either:

• The trustee of a retirement plan maintained by a new employer
• The trustee/custodian of a new or existing IRA in your name

With a direct rollover, you never actually take receipt of the retirement plan funds. The funds go directly from the old plan trustee to the trustee/custodian of the IRA or new plan. For this reason, a direct rollover is often referred to as a trustee-to-trustee transfer.

Caution: An employer plan does not have to permit a direct rollover to certain defined benefit plans.

Indirect Rollovers

With an indirect rollover, the trustee of your old employer plan distributes the funds to you, and then you transfer them to the trustee of your IRA or to the trustee of another employer plan. There are some complications and potential pitfalls with indirect rollovers. In general, it is best to avoid indirect rollovers and utilize direct rollovers instead.

First, with an indirect rollover, the administrator of your old plan must withhold 20% of the taxable portion of the distribution paid to you for federal income tax. This withholding requirement exists because the IRS is concerned that you may take the money as a taxable distribution rather than complete a timely, tax-free rollover to an IRA or another plan. Because of this possibility, the IRS simply assumes that the distribution will be a taxable distribution, not a tax-free rollover.

Technical Note: An eligible rollover distribution is not subject to withholding to the extent it consists of net unrealized appreciation from employer securities (NUA) that can be excluded from your gross income.

Here is the problem with the mandatory tax withholding for indirect rollovers: Generally, if you want to avoid all income taxes on your employer plan distribution, you must roll over 100% of the amount distributed to you from the plan. This generally means that you need to have additional funds available to replace the 20% withheld at the time of distribution.

Tip: You will eventually get the 20% back as a credit for federal income tax withheld when you file your income tax return the following year.

Caution: If you do not make up the 20% with additional funds, the amount withheld will actually be considered a taxable distribution. If you fail to complete the rollover within 60 days, the entire distribution may be treated as a taxable distribution. Further, if you are under age 59½ and do not qualify for an exception, you will be subject to a 10% federal premature distribution tax (and perhaps a state penalty, too).

Example(s): Carol's vested balance in her former employer's plan is $100,000. The entire $100,000 is taxable. Instead of arranging a direct rollover of funds from her former plan to her traditional IRA, Carol decides to do the rollover herself. Since it is an indirect rollover, her plan administrator withholds 20% ($20,000) for federal income tax purposes. Carol receives a check for $80,000. However, she must roll over $100,000 (the entire balance of her plan account) to avoid tax consequences. This means that Carol has to use $20,000 of her own funds to make up the difference. Otherwise, if she rolls over only $80,000, she will be subject to income tax (and perhaps penalties) on the $20,000 shortfall.

Second, you generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan. If you fail to make the rollover within 60 days, you may end up paying income tax (and perhaps penalties) on the entire distribution.

Tip: You may be entitled to an automatic waiver of the 60-day rule if you made a timely payment to a financial institution, and the financial institution fails to complete the rollover within the 60-day period, if certain specific requirements are met. In other cases, you can apply to the IRS for a waiver of the 60-day rule by filing a private letter ruling request. The IRS is authorized to grant waivers to the 60-day rule in cases where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control.

Third, certain amounts you receive from an employer plan can only be rolled over directly to an eligible retirement plan — indirect rollovers are prohibited. For example:

• Nontaxable dollars you receive from a Roth 401(k), Roth 403(b), or Roth 457(b) account can be rolled over to another Roth 401(k)/403(b)/457(b) account only in a direct rollover
• The nontaxable portion of a distribution you receive from a qualified employer plan or from a 403(b) or 457(b) plan can be rolled over to another qualified plan or 403(b) or 457(b) plan only in a direct rollover
• Nonspouse beneficiaries can roll over amounts received from an employer plan to an IRA only in a direct rollover.

The only real benefit of an indirect rollover is that you have the equivalent of a 60-day "loan" from your retirement plan. But there is always the danger of missing the 60-day deadline and becoming subject to income tax (and perhaps penalties) on the distribution. By using a direct rollover, you generally avoid this risk because the money never enters your hands. In addition, direct rollovers are not subject to the federal withholding requirement that applies to indirect rollovers.

Rollovers of Property

If you receive both property and cash in an eligible rollover distribution, you can roll over part or all of the property, part or all of the cash, or any combination of the two that you choose. To roll over an eligible rollover distribution of property, you must either roll over the actual property distributed, or sell it and roll over the proceeds. You cannot keep the distributed property and roll over an equal amount of cash or other property. If you sell the distributed property and roll over all the proceeds, no gain or loss is recognized on the sale. The sale proceeds (including any portion representing an increase in value) are treated as part of the distribution and are not included in your gross income.

If you roll over only part of the proceeds, you are taxed on the part you keep. You must allocate the proceeds you keep between the part representing ordinary income from the distribution (its value upon distribution) and the part representing gain or loss from the sale (its change in value from its distribution to its sale).

Example(s): On June 4, 2011, Jill received an eligible rollover distribution from her employer's noncontributory plan of $50,000 in nonemployer stock. On June 24, 2011, Jill sold the stock for $60,000. On July 3, 2011, she contributed $60,000 cash to a traditional IRA. Jill does not include either the $50,000 eligible rollover distribution or the $10,000 gain from the sale of the stock in income. The entire $60,000 rolled over will be ordinary income when she withdraws it from her IRA.

Property and cash distributed. If you receive a distribution that includes both cash and property, and you do not roll over the entire distribution, you may designate what part of the rollover is allocable to the cash distribution and what part is allocable to the proceeds from the sale of the distributed property. If the distribution includes an amount that is not taxable (other than the net unrealized appreciation in employer securities) as well as an eligible rollover distribution, you may also designate what part of the nontaxable amount is allocable to the cash distribution and what part is allocable to the property. Your designation must be made by the due date for filing your tax return, including extensions. You cannot change your designation after that date. If you do not make a designation on time, the rollover amount or the nontaxable amount must be allocated on a pro-rata basis.

Caution: If you receive a lump-sum distribution from your employer plan that includes employer stock or other securities, make sure to consult with your tax professional prior to making a rollover. In general, when you receive a distribution of employer securities you can elect to pay ordinary income tax only on the plan's cost basis in the securities. You won't pay any tax on any appreciation ("net unrealized appreciation," or NUA) until you sell the securities. However, if you roll the securities over to an IRA, NUA treatment will no longer be available.

Roth Accounts and Roth IRAs

Rollovers from Designated Roth 401(K), 403(B), and 457(B) Accounts

Qualified distributions from a designated Roth 401(k)/403(b)/457(b) account ("designated Roth account") are entirely free from federal income taxes. Nonqualified distributions are subject to tax and potential early-distribution penalties to the extent any investment earnings are distributed to you (your own Roth contributions always come out tax-free). Both qualified and nonqualified distributions may be eligible rollover distributions if they meet the requirements discussed earlier. You can roll over an eligible rollover distribution from a designated Roth account only to another designated Roth account that accepts rollovers, or to a Roth IRA. Distributions cannot be rolled over into any other retirement plan.

IRS regulations provide that separate five-year holding periods apply to Roth 401(k) accounts and Roth IRAs. A rollover from a designated Roth account to a Roth IRA does not affect the Roth IRA's five-year holding period, regardless of how long the dollars rolled over resided in the 401(k)/403(b)/457(b) plan. If you receive a qualified distribution from your designated Roth account, and roll it over to your Roth IRA, the entire amount rolled over will be treated as a nontaxable contribution to the Roth IRA. You can withdraw this amount tax-free from the Roth IRA at any time. Any additional earnings, however, will be subject to the Roth IRA's five-year holding period. If you receive a qualified distribution from your designated Roth account, and roll it over to another designated Roth account, the entire amount rolled over will be treated as a nontaxable contribution to the new plan.

If you roll a distribution from your designated Roth account to another employer's Roth 401(k)/403(b)/457(b) plan, your five-year holding period in the receiving plan, for both the amount rolled over and other funds in the receiving plan, will be the five-year holding period in the sending plan or the five-year holding period in the receiving plan, whichever ends first (i.e, whichever is more favorable to you). This means that if you roll a qualified distribution from a designated Roth account to a designated Roth account in a new employer's 401(k)/403(b)/457(b) plan, both the amount rolled over, and all of the assets in the receiving designated Roth account, will be deemed to have satisfied the five-year holding period requirement for qualified distributions. If you receive a nonqualified distribution from your designated Roth account, some special rules apply:

First, as noted earlier, Nontaxable dollars you receive from a Roth 401(k), Roth 403(b), or Roth 457(b) account can be rolled over to another Roth 401(k)/403(b)/457(b) account only in a direct rollover — 60-day rollovers are not permitted. Second, if you roll over only part of a non-qualified distribution from a designated Roth account, and a portion is paid to you at the same time, the portion rolled over is considered to be first from the taxable (earnings) portion of the distribution.

Example(s): On termination of employment you receive a lump-sum distribution of $14,000 that is not a qualified distribution from your designated Roth account. The distribution consists of $11,000 of your after-tax Roth contributions and $3,000 of investment earnings. Within 60 days of receipt, you make an indirect rollover of $7,000 into a Roth IRA. The $7,000 is deemed to consist of $3,000 of investment earnings and $4,000 of your contributions. Since you rolled over the part of the distribution that could be included in gross income (the taxable earnings), none of the distribution is included in your gross income.

Third, if you receive a nonqualified distribution from your designated Roth account, and roll it over into a Roth IRA, only the amount of your Roth contributions to the 401(k)/403(b)/457(b) plan, not the investment earnings, will be treated as a contribution to the Roth IRA. The investment earnings rolled over, along with any additional investment earnings, will be subject to the Roth IRA's five-year holding period. [As indicated earlier, IRS regulations provide that separate five-year holding periods apply to designated Roth accounts and Roth IRAs. A rollover from a Roth 401(k)/403(b)/457(b) plan to a Roth IRA does not affect the Roth IRA's five-year holding period, regardless of how long the dollars rolled over resided in the 401(k)/403(b) plan.] Because the five-year holding period is one of the factors in determining when your distributions will be tax-free, make sure you understand the consequences before choosing how and when to roll over funds from a designated Roth account.

Example(s): Jane, who is 56, begins making Roth contributions to her employer's 401(k) plan in 2016. Her five-year holding period in the 401(k) plan ends December 31, 2020. In 2019, at age 60, Jane terminates her employment and decides to roll over her Roth 401(k) account to a Roth IRA, the first she has established. The distribution is not qualified because Jane has not satisfied Roth 401(k) five-year holding period. The distribution consists of $10,000 of Jane's Roth 401(k) contributions, and $2,000 of investment earnings. The $10,000 will be treated as a contribution to the Roth IRA, which Jane can withdraw tax-free at any time. The $2,000, however, will be treated as investment earnings in the Roth IRA. Because Jane established her first Roth IRA in 2019, the earliest she can receive a qualified distribution of investment earnings from the Roth IRA is 2023. She has effectively lost the four years she held those dollars in the 401(k) plan. Jane should have waited one more year to make her rollover.

Example(s): Ann is 40 years old. She starts making Roth contributions to her employer's 401(k) plan in 2010. After 10 years, Ann terminates her employment and decides to roll over her Roth 401(k) account to a Roth IRA, the first she has established. The distribution consists of $150,000 of Ann's Roth 401(k) contributions, and $75,000 of investment earnings. Even though Ann has satisfied the 401(k) plan five-year holding period, the distribution is nonqualified because Ann is not 59½ or disabled. The $150,000 will be treated as a contribution to the Roth IRA, which Ann can withdraw tax-free at any time. The $75,000, however, will be treated as investment earnings in the Roth IRA. Because Ann established her first Roth IRA in 2020, the earliest she can receive a qualified distribution of those investment earnings from the Roth IRA is 2024.

Rollover of Non-Roth Distributions from Employer Plans to Roth IRAs.

If you receive an eligible rollover distribution of non-Roth funds from an employer plan, you can directly or indirectly roll over all or part of those funds to a Roth IRA. The taxable portion of the distribution that you roll over (or "convert") will be subject to federal income tax in the year of the rollover/conversion.

Caution: Non-spouse beneficiaries can roll over funds from an employer plan to a Roth IRA only in a direct rollover. Indirect (i.e., 60-day) rollovers are not permitted.

In-Plan Rollover (Conversion)

An in-plan Roth conversion (also called an "in-plan Roth rollover") allows you to transfer the non-Roth portion of your 401(k), 403(b), or 457(b) plan account (for example, your pre-tax contributions and company match) into a designated Roth account within the same plan. You'll have to pay federal income tax now on the amount you convert, but qualified distributions from your Roth account in the future will be entirely income tax free. Also, the 10% early distribution penalty generally doesn't apply to amounts you convert (but that tax may be reclaimed by the IRS if you take a nonqualified distribution from a Roth account within five years of the conversion).

While in-plan conversions have been around since 2010, they haven't been widely used, because they were available only if you were otherwise entitled to a distribution from your plan — for example, upon terminating employment, turning 59½, becoming disabled, or in other limited circumstances. However, in these instances, you would also be able to roll over your funds into a Roth IRA, which could often be a more attractive conversion alternative.

The American Taxpayer Relief Act of 2012 eliminated the requirement that you be eligible for a distribution from the plan in order to make an in-plan conversion. If your plan permits, you can convert any part of your traditional 401(k) plan account into a designated Roth account regardless of whether you are otherwise eligible for a plan distribution.

Tip: Keep in mind that if you're entitled to an eligible rollover distribution, you can always roll those dollars into a Roth IRA instead of using an in-plan conversion.

Caution: Whether a Roth conversion makes sense financially depends on a number of factors, including your current and anticipated future tax rates, the availability of funds with which to pay the current tax bill, and when you plan to begin receiving distributions from the plan. Also keep in mind that the additional income from the conversion may impact your tax credits, deductions, and phaseouts; marginal tax rates; alternative minimum tax liability; and eligibility for college financial aid. So be sure to consult a qualified professional before making a conversion.

Advantages of Doing a Rollover

A Rollover Is Not a Taxable Distribution

A properly completed rollover (direct or indirect) is a tax-free transfer of assets, not a taxable distribution. This means that if you complete the rollover on a timely basis and follow other federal rollover rules, you will not be subject to income tax or early withdrawal penalties on the money when rolled over. You will not have to pay federal or state income tax on the money until you begin taking taxable distributions from the IRA or new plan. By that time, you may be retired and in a lower income tax bracket. Also, if you are 59½ or older when you take distributions, you will not have to worry about premature distribution penalties.

Caution: See special rules applicable to "Roth Accounts and Roth IRAs," above.

A Rollover Allows Continued Tax-Deferred Growth

When you do a rollover, you are simply moving your retirement money from one tax-favored savings vehicle to another. This allows the money to continue growing tax deferred in the IRA or new plan, with little or no interruption. Tax-deferred growth allows your retirement money to potentially grow more rapidly than it might outside an IRA or retirement plan. To understand why, consider the power of compounding. As your IRA or plan investments earn money, those earnings compound on top of your principal and any earnings that have already accrued. As this is happening, no tax is due while the funds remain in the IRA or plan. Depending on investment performance, the long-term effect on your savings can be dramatic. In most cases, this benefit is lost if you receive a distribution from your employer's plan and do not roll it over.

A Rollover May Be an Option Every Time You Leave a Job

You may be able to roll over your vested benefits in a former employer's retirement plan every time you leave a job (whether voluntarily or involuntarily). In addition, if you join another employer's retirement plan and the plan accepts rollovers, you can generally roll over your benefits from the old plan to the new plan. There is no limit on the number of rollovers from an employer-sponsored retirement plan you can do, which is an advantage for those who change jobs frequently.

Disadvantages of Doing a Rollover

You Cannot Revoke a Rollover Election

Once you have elected in writing to roll over your retirement plan benefits to an IRA or another plan and received payment, you typically cannot change your mind and revoke the election. If you do try to revoke it, you will generally be subject to income tax and penalties on all or part of the distribution. Before you elect the rollover option, be absolutely certain that this is what you want.

An Indirect Rollover Can Be Costly

If you are considering an indirect rollover, bear in mind the 20% mandatory withholding requirement. To complete the rollover, you must generally make up the 20% out of your own funds, or be subject to income tax and possibly penalties on the shortfall. This can be a problem if you do not have cash available to replace the 20%. Also, with an indirect rollover, you generally have only 60 days to complete the rollover. The 60-day period begins with the date on which you receive the distribution from the former employer's retirement plan. If you fail to complete the rollover within this time frame, all or part of the distribution to you will be taxable and perhaps penalized.

Loss of Lump-Sum Averaging and Capital Gain Treatment

Lump-sum distributions from qualified employer plans payable to participants born before 1936 may qualify for special income tax benefits if specific requirements are satisfied. The benefits may include 10-year averaging and capital gains treatment (for distributions attributable to pre-1974 participation in an employer plan). If you roll over all or part of a distribution from a qualified employer plan into an IRA, neither that distribution, nor any future lump-sum distribution you receive from the qualified plan, will be eligible for special 10-year averaging or capital gains treatment. Note: alternate payees under a QDRO and plan beneficiaries may also be eligible to use these special tax rules if the plan participant was born before 1936 and other conditions are satisfied.

Is It Better to Roll Over to an IRA or to Another Employer's Plan?

One of the most common questions people ask is: Should I roll over my retirement money to an IRA or to another employer's retirement plan? Assuming both options are available to you, there is no right or wrong answer to this question. There are strong arguments to be made on both sides. You need to weigh all of the factors, and make a decision based on your own needs and priorities. It is best to have a professional assist you with this, since the decision you make may have significant consequences — both now and in the future.

Reasons to Roll Over To an IRA

• You generally have more investment choices with an IRA than with an employer plan. You typically may freely move your money around to the various investments offered by your IRA trustee, and you may divide up your balance among as many of those investments as you want. By contrast, employer plans typically give you a limited menu of investments (usually mutual funds) from which to choose.

Caution: Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund. Read it carefully before investing.

• You can freely move your IRA dollars among different IRA trustees/custodians. Unlike indirect rollovers between IRAs, which are generally limited to one in any 12-month period, there is no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year. This gives you flexibility to change trustees often if you are dissatisfied with investment performance or customer service. It can also allow you to have IRA accounts with more than one institution for added diversification. With an employer's plan, you cannot move the funds to a different trustee unless you leave your job and roll over the funds.
• An IRA may give you more flexibility with distributions. The distribution options available to you and your beneficiaries in an employer plan are typically limited. With an IRA, the timing and amount of distributions is generally at your discretion (until you must start taking required minimum distributions, if applicable).
• If you've made Roth contributions to your 401(k) or 403(b) plan, those contributions (plus any investment earnings on them) will be subject to required minimum distribution (RMD) rules after you turn 70½ (or after you retire, if later, if you own 5% o less of your employer). You can avoid the RMD rules by rolling your Roth contributions over to a Roth IRA (Roth IRAs are not subject to the lifetime RMD rules).
• You can use an individual retirement annuity to effectively annuitize all or part of your employer plan benefit. This can be helpful if your plan doesn't provide an annuity option.

Reasons to Roll Over To another Employer's Retirement Plan

• Many employer-sponsored plans have loan provisions. If you roll over your retirement funds to a new employer's plan that permits loans, you can generally borrow against your vested balance in the new plan, including the amount rolled over, if you need money. You cannot borrow from an IRA — you can only access the money in an IRA by taking a distribution, which may be subject to income tax and penalties.
• A rollover to another employer plan may provide greater creditor protection than a rollover to an IRA. Assets in employer plans that are subject to the non-alienation provisions of ERISA [for example, most 401(k) plans] receive virtually unlimited protection from creditors under federal law. Your creditors cannot attach your plan funds to satisfy any of your debts and obligations, regardless of whether you've declared bankruptcy. In contrast, traditional and Roth IRAs are generally protected under federal law only if you declare bankruptcy. Any creditor protection your IRA may receive in cases outside of bankruptcy will generally depend on the laws of your particular state. If you are concerned about asset protection, be sure to seek the assistance of a qualified professional.

Caution: Individual (solo) 401(k) plans, governmental plans, and certain church plans are not subject to ERISA.

• Distributions from your employer plan won't be subject to the 10% premature distribution penalty if you retire during the year you turn 55 or later (age 50 for qualified public safety employees participating in certain governmental plans). However, distributions from your IRA before you turn age 59½ will be subject to the penalty tax, unless an exception applies.
• You may be able to postpone required minimum distributions. These distributions usually must begin by April 1 following the year you reach age 70½. However, if you work past that age and are still participating in your employer's retirement plan, you can delay your first distribution from that plan until April 1 following the year of your retirement. (You also must own no more than 5% of the company.) This deferral exception is not available for IRAs. (Minimum distributions are not required from Roth IRAs during your lifetime.)
• While IRAs typically provide more investment choices than an employer plan, there may be certain investment opportunities in your particular plan that you cannot replicate with an IRA. Further, you may be satisfied by the low-cost institutional funds available in your particular plan, and therefore you may not regard an IRA's broader array of investments as an important factor.

Caution: All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Other Considerations

• Before deciding whether to retain assets in a 401(k) or roll over to an IRA, consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of FINRA website for additional information.
• Both employer retirement plans and IRAs typically involve: (1) investment-related expenses, and (2) plan or account fees. Investment-related expenses may include sales loads, commissions, the expenses of any mutual funds in which assets are invested, and investment advisory fees. Plan fees typically include plan administrative fees (e.g., recordkeeping, compliance, trustee fees) and fees for services such as access to a customer service representative. In some cases, employers pay for some or all of the plan's administrative expenses. An IRA's account fees may include, for example, administrative, account setup, and custodial fees. Be sure to carefully consider the expenses and fees in each alternative.
• Also be sure to consider the different levels of service available under the employer's plan versus an IRA. Some employer plans, for example, provide access to investment advice, planning tools, telephone help lines, educational materials, and workshops. Similarly, IRA providers offer different levels of service, which may include full brokerage service, investment advice, distribution planning, and access to securities execution online.

Special Considerations for Distributions from Designated Roth 401(K)/403(B)/457(B) Accounts

If you receive a nonqualified distribution from your designated Roth 401(k)/403(b)/457(b) account, and roll it over into a Roth IRA, the investment earnings rolled over, along with any additional investment earnings, will be subject to the Roth IRA's five-year holding period. (IRS regulations provide that separate five-year holding periods apply to designated Roth accounts and Roth IRAs.

A rollover from a designated Roth account to a Roth IRA does not affect the Roth IRA's five-year holding period, regardless of how long the dollars rolled over resided in the 401(k) plan.) On the other hand, if you receive a distribution from your designated Roth account, and roll it over into a designated Roth account in a new employer's 401(k), 403(b), or 457(b) plan, your five-year holding period in the receiving plan, for both the amount rolled over and other funds in the receiving plan , will be the five-year holding period in the sending plan or the five-year holding period in the receiving plan, whichever ends first (i.e, whichever is more favorable to you).

Required minimum distributions (RMDs) are generally required from Roth 401(k)/403(b) accounts after you turn 70½ (or after you retire if later, unless you're a 5% owner). However, Roth IRAs are not subject to the lifetime RMD rules. You can avoid the Roth 401(k)/403(b) lifetime RMD rules by rolling your eligible distribution over to a Roth IRA.

How to Do a Rollover

There are seven steps that you should follow to complete a rollover:

1. If rolling over to another employer's plan, check with the new plan administrator to make sure the plan accepts rollovers.
2. Consult your tax advisor before selecting a rollover to make sure this is the right option for you. Rollovers can have a long-term impact on your retirement planning, as well as your tax liabilities. In addition, certain distributions from employer plans are eligible for special tax treatment that may be lost if you roll all or part of the distribution over to an IRA.
3. Review the notice from your old plan administrator explaining the rollover rules, the direct rollover option, and the consequences of an indirect rollover, the withholding rules, and the possible reduction or deferral of taxes.
4. Decide whether you want to do a direct rollover or an indirect rollover. Then, make the necessary arrangements with your old plan administrator, and either the new plan administrator or the IRA custodian/trustee.
5. Obtain your spouse's consent, if required. Some plans require written spousal consent.
6. Make sure that a check (made out properly, and in the correct amount) is sent from your old employer's plan to the new employer's plan, the IRA trustee/custodian, or you personally, depending upon the method of distribution you selected. If the check is not made out properly, don't endorse it or deposit it. Have a new check prepared with the correct payee.
7. If you receive the funds personally, make sure that you roll over those funds within 60 days to an IRA or another employer's plan to avoid taxes and penalties. In general, you should avoid a distribution directly to you in order to avoid the 20% federal withholding requirement.

Income Tax Consequences of Doing a Rollover

As discussed, a timely and properly completed rollover is treated as a tax-free transfer of retirement assets. However, if an indirect rollover is not completed within 60 days, the portion of the distribution that is not rolled over will generally be treated as taxable income to you (excluding any after-tax contributions you made to your plan). In addition, if you are under age 59½ and do not qualify for an exception, the taxable portion of your distribution may be subject to a 10% federal premature distribution penalty tax on the distribution (and possibly a state penalty as well).

Caution: See special rules applicable to "Roth Accounts and Roth IRAs," above.

Estate and Gift Tax Consequences of Doing a Rollover

Any amounts remaining in your retirement plans and IRAs at the time of your death are treated like the rest of your assets for federal estate tax (and possibly state death tax) purposes — they are included in your taxable estate to determine if estate tax is due.

Tip: Your beneficiary may be entitled to an income tax deduction equal to the estate taxes paid that are attributable to the inclusion of your IRA(s) in your estate (the "income in respect of a decedent," or IRD, deduction). Consult your tax professional.

Qualified Plan Automatic Rollover Rule

Qualified retirement plans often contain a provision that requires the mandatory cashout, without your consent, of small benefits — generally vested benefits with a present value of $5,000 or less — if you (the plan participant) terminate employment before you reach age 62 or the plan's normal retirement age, whichever is later. However, if the mandatory cashout is greater than $1,000, the plan must make the payment to an IRA established for you, unless you affirmatively elect to receive the payment in cash, or to roll it over into another qualified employer retirement plan or into an IRA. The rule doesn't apply to distributions to beneficiaries or alternate payees, to plan loan offset amounts, or to distributions that don't qualify as eligible rollover distributions. This rule also applies to Section 403(b) plans and governmental Section 457(b) plans.

Conduit IRAs

A conduit IRA is not technically a specific type of IRA. It is an IRA that is being used for a specific purpose — as the term "conduit" suggests, to temporarily hold funds that you have rolled over from a former employer's retirement plan. Prior to 2002, conduit IRAs had special importance — using a conduit IRA was the only way funds could move from a qualified employer plan to an IRA, and then back to another qualified employer plan. The conduit IRA could only contain funds rolled over from an employer plan, and the investment earnings on those funds. You were not allowed to commingle those rolled over funds with regular IRA contributions and their earnings. If you violated this rule, you lost the right to later move the rolled over funds and their earnings from the conduit IRA to another employer's qualified plan.

However, as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Congress passed provisions to make it easier to roll over funds between IRAs and different types of employer-sponsored retirement plans, and conduit IRAs are now largely only of historical importance.

Caution: Even though not required, some employer plans may only accept rollovers from conduit IRAs.

Caution: If you were born before 1936, you may be entitled to special tax treatment for certain lump-sum distributions from an employer qualified plan. However, this special tax treatment may be lost if you make a rollover to the employer plan from an IRA other than from a conduit IRA. Seek professional assistance if this may apply to you.

While conduit IRAs may be of limited importance, it still may make sense to maintain separate IRAs in some instances. For example, amounts you roll over from a qualified employer plan or 403(b) plan to a traditional or Roth IRA (and earnings on those funds) are generally entitled to unlimited protection from your creditors under federal law if you declare bankruptcy. However, your other (non-rollover) traditional and Roth IRA assets are generally protected only to an aggregate limit of $1,362,800 (scheduled for adjustment in April 2022). It may make sense in some cases to maintain a separate IRA for the amount rolled over in order to more easily track the dollars that are entitled to unlimited bankruptcy protection.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

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