Nuts and Bolts: How to do a Rollover of Your Employer Retirement Plan the Right Way
Let’s walk through a few considerations:
- The difference between direct and indirect rollovers
- How to roll over to a new employer’s plan or an IRA
- Tax pitfalls to avoid
- When to consider a special rollover IRA
Let’s get started.
✅ What Is a Rollover?
A retirement plan rollover moves your retirement savings from one account to another—without triggering taxes or penalties (if done right).
There are two main types: direct and indirect.
- Direct Rollover – The safest option. Your funds go straight from your old account to a new one. Bang, done.
- Indirect Rollover – You receive the money first, then must deposit it elsewhere within 60 days. This one has some pitfalls.
Believe it or not, you have 6 options! Worthwhile suggestion: You can learn more about your options in this series of videos. Pick the one(s) that applies to you!
🔄 Direct Rollovers: The Smartest Move
🏢 Rollover to a New Employer’s Plan
Thinking about consolidating your old 401(k) with your new employer’s plan?
Here’s what to do:
- Choose “direct rollover” on your old plan’s distribution form.
- Contact your new plan’s administrator to ensure they accept rollovers.
- Your old plan will:
- Wire the funds, or
- Send a check payable to your new plan for deposit.
Pro Tip: Consolidating makes it easier to track your savings and manage your investments.
🏦 Rollover to an IRA
Prefer more control or better investment choices? An IRA rollover might be for you.
Steps:
- Open an IRA or use an existing one.
- Provide your account info to your old plan.
- Your plan administrator will:
- Transfer the funds directly, or
- Issue a check payable to your IRA.
See the 5 things you can do with an IRA you can’t do with a 401(k).
⚠️ Indirect (60-Day) Rollovers: Use With Caution
An indirect rollover means the funds are sent to you first—you then have 60 days to complete the rollover to avoid taxes and penalties.
Here’s the catch:
- Your employer must withhold 20% for taxes. If you want to roll over the full amount, you’ll need to replace that 20% out of pocket.
- If you miss the 60-day window, the IRS considers it a distribution—which means income taxes and possibly a 10% early withdrawal penalty.
Unless you need temporary access to the cash, a direct rollover is the safer option.
Rollovers can contain some irreversible pitfalls. You want to avoid the Fatal Rollover Oversight.
🚫 Not Everything Can Be Rolled Over
Some distributions aren’t eligible:
- Hardship withdrawals
- Required Minimum Distributions (RMDs)
- Substantially equal periodic payments
- Corrective distributions
If you inherited an account and you’re not the spouse, you have only one option: roll the funds into an inherited IRA via direct transfer.
🔐 Do You Need a Special “Rollover IRA”?
Not required, but sometimes helpful. A Rollover IRA (aka conduit IRA) is typically used when:
- You may want to move funds back into an employer plan later.
- You want stronger bankruptcy protection, since rolled-over employer funds often receive better federal protection.
You can always move funds from a Rollover IRA to a Traditional IRA later.
🆘 Missed the 60-Day Deadline? You May Qualify for a Waiver
If illness, natural disaster, or another issue prevented you from completing a rollover in time, the IRS offers three ways to get a waiver:
- Automatic waiver
- Self-certification
- Private letter ruling
A tax professional can guide you through the right path.
📊 Special Note: Employer Stock & Net Unrealized Appreciation (NUA)
If you receive highly appreciated company stock in your distribution, consult a tax advisor before rolling it into an IRA. You might qualify for Net Unrealized Appreciation (NUA) tax treatment—potentially saving thousands in taxes. Need help? That’s what advisors are for!
💬 Final Thoughts: Don’t Go It Alone
Rolling over your retirement account is a smart move—but the process can be tricky. In most cases, a direct rollover to an IRA offers the best mix of flexibility, control, and tax protection.
🎯 Your Next Steps:
- Review your plan’s distribution options
- Decide whether to use an IRA or your new employer’s plan
- Talk to a financial advisor or rollover specialist
📣 Need Help?
Get your planning started today!
Don’t forget to bookmark this guide and share it with anyone who’s changing jobs or retiring soon.
Jim
Concerned about inflation and Social Security? The Center for Retirement Research at Boston College published a report on The Impact of inflation on Social Security Benefits. You can access it here.
If you’re worried about the future for Social Security? See this 13-minute video at https://vimeo.com/928808668
