Rollovers

April 13, 2006

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A rollover is defined as a transfer of retirement assets from one retirement plan to another. It most commonly occurs when an individual changes jobs and transfers vested retirement funds from the former employer to the new employer or to an IRA account.

Technically, of course, the individual's receipt of the funds from the first retirement plan is a distribution that would normally mean that the individual would have to pay taxes on the money received. However, if certain conditions are met, the individual will be allowed to roll the money over without paying taxes.

For the rollover to be tax free, the transfer must be to an "eligible retirement plan" and it must be made within 60 days of the day it is received. An "eligible retirement plan" is generally any of the following:

an individual retirement account or annuity (IRA)
a qualified employer's retirement plan (such as a 401(k))
a qualified annuity

The rollover can be split up among, for example, several IRAs or it can be split up among each of the plans listed above, as long as all the transfers are done within 60 days of receipt.

Did You Know?

Did you know that there is a automatic (default) rollover rule for qualified retirement plans? The rule, which was added by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), applies to mandatory distributions of more than $1,000 from a qualified retirement plan made on or after March 28, 2005.

Under the requirements, mandatory distributions from a retirement plan, including governmental and church plans, must be paid in a direct rollover to an individual retirement plan unless the distributee elects to have the amount rolled over to another retirement plan or to receive the distribution directly. A mandatory distribution is a distribution that is made without the participant's consent and is made to a participant before the participant attains the later of age 62 or normal retirement age. However, a distribution to a surviving spouse or alternate payee does not count as a mandatory distribution.

The plan administrator must notify a distributee in writing when a distribution will be paid in a direct rollover to an IRA. In the meantime, contact your plan administrator if you have any questions about the mechanics of the automatic rollover provision.

Certain types of plans face restrictions on how they may be rolled over. Most notably, SIMPLE plan accounts may be rolled over only into an IRA or another SIMPLE plan. However, beginning in 2002, distributions from the IRA form of SIMPLE accounts that an employee has participated in for at least two years can be rolled over into other types of retirement plans, such as employer qualified plans and deferred compensation plans of exempt employers, organizations and public schools.