How do I rollover a retirement account?

Four years: That’s the average job tenure of both wage and salary workers in the United States.^[1] Based on those statistics, it’s realistic to assume you’ll have more than one job during your career. If a position you leave comes with a retirement account, you may want to or need to do something with those savings.

One option: Complete a rollover of your retirement funds into another account. Use these insights to figure out the rollover that makes the most sense for your financial plans.

What is a rollover?

A rollover is simply when you move retirement savings from one account into another. It’s an action you take, not an account called a rollover. You might choose to rollover retirement funds for a number of reasons including:

• You leave a job.
• You retire and don’t want to leave your money in the employer’s retirement plan.
• You have multiple retirement savings accounts and want to consolidate them.

What kind of account can I use to rollover retirement savings?

Many people choose to rollover retirement savings into a traditional individual retirement account (IRA). You may also be able to rollover funds into a Roth IRA or a 401(k) provided by your new employer. Each of the three has implications for your financial plans.

What do I need to know about a rollover into an IRA?

If you decide to use an IRA for your rollover, you can either set up a new IRA (if you don’t have one) or use an existing IRA. Here are some considerations for this type of rollover:

• An IRA travels with you. That means no matter how often you change jobs, you can use the same account.
• You won’t have to pay taxes on the IRA rollover until you make withdrawals in retirement.
• You may have more investment options with an IRA. Check with your financial professional for specifics.
• You can make additional contributions to an IRA, in addition to the rollover totals. And rollovers don’t count against your IRA tax-deductible contribution limits. (IRAs do have regular tax deduction income limits; check with your tax advisor for details.)
• IRAs are not protected during bankruptcy, and you cannot take loans from IRAs.

What do I need to know about a rollover into a Roth IRA?

If you choose to do a rollover into a Roth IRA, there are some similarities to a rollover into an IRA, but also a few additional considerations:

• You may have more investment options with a Roth IRA, as you do with a traditional IRA.
• There may be tax implications. A Roth IRA is funded with post-tax dollars; you’ve already paid the required income tax. So, if you’re moving rollover funds from a pre-tax account (401(k), IRA) to a post-tax account (Roth IRA) you have to pay the required income taxes at your normal rate in that tax year. When might this make sense? If you’re very early in your career and think you might be at a higher income bracket in later years, paying taxes now might fit into your plans. On the flip side, Roth IRA contributions have income limitations, but rollover contributions to a Roth IRA do not.
• You are also exempt from tax implications if the rollover is from one Roth IRA (such as a Roth 401(k)) to another Roth IRA. The only funds taxable in this situation are matching contributions from an employer.
• A Roth IRA may have tax advantages for smaller rollover amounts. Many retirement plans have a cash-out limit, meaning if you leave a job and your 401(k) is below a certain amount (typically $7,000), your former employer will send you the total, minus a 20% withholding and a 10% IRS early distribution penalty. In this case, you’ve already paid taxes, so putting the rollover funds in a Roth IRA helps preserve some of your established retirement savings.
• You cannot take a loan against a Roth IRA and the funds aren’t protected during bankruptcy, as with a traditional IRA.

Both a financial professional and a tax advisor can help you decide if a rollover into a Roth IRA is right for you.

Can I do a rollover from one 401(k) to another 401(k)?

Yes—if allowed by the new plan at your new employer. Because both the existing accounts are tax-deferred, you won’t pay any income taxes until withdrawal. But if you leave that job, you’ll have to decide what to do with the 401(k) funds again.

What if I’m retired and want to do a rollover?

Consult with your financial professional. If you are already taking the required minimum distributions (RMD) from your 401(k), you may want to think about the timing of taking the RMD before completing the rollover.

What’s the difference between a direct and an indirect rollover?

When you complete a rollover, you have two options: direct or indirect. Direct simply means the current plan administrator sends the funds directly to the account for the rollover. With an indirect rollover, the funds are sent to you to complete the rollover, which you must do within 60 days. Risk is inherent in an indirect rollover: 20% withholding is automatically deducted from the total, an amount you only get back if you complete the rollover within that time period. If you don’t, it’s considered a distribution, and you’ll incur both taxes and the IRS distribution penalty of 10%.

Will I get a tax form if I do a rollover?

Yes, you’ll receive both a 1099R and 5498.

How do I complete a rollover?

If you don’t have an account such as an IRA set up, you must complete that first. Then, contact your current plan administrator and ask to rollover the funds.

A few reminders before completing a rollover

• Work through financial planning and tax implications of your choices with your tax advisor and financial professional.
• Consider completing your rollover as soon as you leave or change jobs so you don’t forget about the funds.