With a 401(k) plan, which is a type of retirement savings plan sponsored by an employer, a rollover refers to the process of transferring the funds from your 401(k) account to another retirement plan or individual retirement account (IRA). This can occur when you change jobs or retire. There are two types of rollovers:
- Direct Rollover: The funds are transferred directly from your 401(k) plan to another retirement plan or IRA. There are no taxes withheld from your transferred amount during a direct rollover.
- Indirect Rollover: You receive a distribution from your 401(k) plan and then you must deposit it into another retirement plan or IRA within 60 days. If this is not completed within 60 days, the distribution may be subject to income tax and potential early withdrawal penalties. With an indirect rollover, the employer typically withholds 20% for federal taxes, which you must replace with other funds if you want to roll over the entire distribution to another plan.
Rollovers are a way to keep your retirement savings tax-deferred and potentially avoid early withdrawal penalties while maintaining the growth potential of your investments. It’s important to follow the IRS rules carefully to ensure that the rollover is executed correctly and to avoid unintended tax consequences.