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Beginning Investor IRAs Retirement Planning

Moving Your Retirement Savings: The Basics of Rollovers

Understanding the rules of retirement account rollovers can help you steer clear of unnecessary taxes and penalties.

by Tudor Pop | May 2025

  • Learn the rollover types and the rules for different retirement plan accounts
  • The risks of forced distributions from employers and how to find lost retirement accounts
  • Rollover best practices to optimize your retirement savings strategy

Retirement account rollovers are a critical aspect of managing your retirement savings, especially when you change jobs or transition into retirement. Whether you’re considering consolidating accounts or optimizing your tax strategy, understanding how rollovers work can help you make informed decisions about your financial future.

A rollover is the process of transferring funds from one retirement account to another. There are two ways to execute a rollover: trustee-to-trustee or indirect. Using a trustee-to-trustee transfer ensures your funds are moved directly from one retirement account to another. This method helps avoid any tax penalties or missed deadlines. It can also maintain tax-deferred growth without interruption. With an indirect rollover, you receive a check or distribution, which must be deposited into another qualified account within 60 days to avoid taxes and penalties.

The most commonly used retirement accounts are employer-sponsored plans and individual retirement accounts (IRAs). Employer-sponsored plans—such as 401(k) plans—offer pretax contributions, tax-deferred growth and potential employer matching. Traditional IRAs also offer tax-free growth and tax-deductible contributions. IRAs are set up by individuals through financial institutions and typically offer more flexibility on investment options than 401(k) accounts do.

Roth 401(k)s and Roth IRAs are retirement accounts where contributions are made with aftertax assets, but income grows tax-free.

Rollover Rules

Each type of retirement account has specific rules regarding rollovers, summarized in Figure 1.

Figure 1. The Internal Revenue Service’s Rollover Chart

Workplace Plan to Traditional IRA: This type of rollover typically gives you access to a wider range of investment options, allowing you to better tailor your portfolio. IRAs also usually have lower fees than 401(k)s. However, you will lose certain protections from creditors because employer-sponsored retirement accounts have specific protections under the Employee Retirement Income Security Act (ERISA).

Workplace Plan to New Workplace Plan: When changing jobs, rolling over your old 401(k) account to your new employer’s 401(k) plan can be a convenient option. Check with your plan sponsor on rules and limits within your new plan.

Traditional IRA to Another Traditional IRA: This type of rollover ensures that the tax-deferred status is retained. In addition, these rollovers do not count against your annual IRA contribution limit. (The IRS limits indirect rollovers for IRAs to one per 12-month period.)

Roth IRA Conversions: Converting a 401(k) account or traditional IRA to a Roth IRA can be a smart move if you want to benefit from tax-free growth. While you’ll pay taxes on the amount you convert now, your funds will grow tax-free in the future. After you reach age 59½, you can generally make tax-free withdrawals in retirement, provided that the Roth IRA has been open for at least five years. This is useful if you expect to be in a higher tax bracket in the future.

Forced Distributions Create Rollover Need

When you leave a job, your employer can force a distribution of your retirement account under certain conditions, primarily based on the account’s vested balance. The vested balance is the amount you own outright that the employer cannot take back.

For vested balances under $1,000, an employer might cash out the account and send a check directly to the former employee. Vested balances of $1,000 to $7,000 can be transferred to an IRA of the employer’s choice. A distribution cannot be forced for vested balances over $7,000.

Some companies automatically enroll new employees in their workplace retirement plan. Consequently, workers may have small accounts that are subject to these forced distributions when they change jobs. If a rollover is not arranged by the departing employee and a forced distribution takes place, the balance is subject to taxes and possibly penalties.

Locating Lost Retirement Accounts

Employees who change jobs could inadvertently leave behind retirement accounts held in their name. The U.S. Department of Labor (DOL) Employee Benefits Security Administration maintains the Retirement Savings Lost and Found Database, which can be searched for lost or forgotten retirement accounts. Workers can also check the database when trying to track down accounts from employers that went out of business. In addition, the site provides guidance on how to claim funds you find.

Best Practices for a Smooth Rollover

The following are some tips to ensure your rollover is handled in the proper way.

  1. Opt for a direct rollover: Sending funds directly from one account to another minimizes the risk of missing the 60-day deadline, avoiding potential taxes and penalties.
  2. Don’t miss the 60-day window for indirect rollovers: If you receive a distribution from your retirement account and intend to roll it over, you must deposit the full amount into another qualified account within 60 days to avoid taxes and penalties.
  3. Consider Roth IRA conversions carefully: Keep in mind that amounts converted to a Roth account from a traditional IRA or 401(k) are taxed as ordinary income in the year of conversion.
  4. Review investment options: Before you roll over funds to a new account, review the investment options available. Make sure the new plan aligns with your retirement goals and risk tolerance.
  5. Promptly reinvest rollover proceeds: Avoid keeping your rollover funds in a cash account. Invest them promptly to take advantage of compounding.
  6. Keep detailed records: Keep a record of all your rollover transactions, including confirmation documents. This will ensure you can verify the transactions for tax purposes.
  7. Keep track of plan contributions: It is especially important to keep track of your plan contributions if you are automatically opted into a workplace retirement plan.

401(k) and IRA Contribution Limits for 2025

For 2025, the contribution limit for 401(k)s and similar plans is $23,500. If you are age 50 or older, you can contribute an additional $7,500 in catch-up contributions. The contribution limit for traditional and Roth IRAs is $7,000 in 2025. Individuals 50 and older can contribute an additional $1,000 in catch-up IRA contributions. See AAII’s annual tax guide to keep up to date on contribution limits. 

Discussion

CHARLES L from TX posted about 1 year ago:

One other consideration from a 401(k) rollover to an IRA is taking a distribution in kind of company stock in the 401(k). You must pay tax on the company stock, but only on the basis cost for it. The remainder of the value is Net Unrealized Appreciation (NUA). If it has appreciated a lot, this can be beneficial as when you eventually sell the stock, you just pay long-term capital gains. Also, the NUA portion of the value is not subject to the 3.8% Net Investment Income Tax (NIIT) surcharge if your income is above that threshold.


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