How a 401(k) rollover works, step by step

A rollover moves retirement savings from one account to another, such as from a former employer's 401(k) to an IRA or to a new employer's plan. Done correctly, a rollover of pre-tax money to another pre-tax account generally is not taxable. There are two ways to do it, and the difference between them matters.

Direct rollover

In a direct rollover, you ask the old plan's administrator to send the money straight to the new plan or IRA. Sometimes the plan mails you a check, but it is made payable to the new account rather than to you. The IRS states that no taxes are withheld from a direct rollover.

Indirect (60-day) rollover

In an indirect rollover, the plan pays the distribution to you, and you then deposit it into another plan or IRA. Two rules apply:

• The 60-day rule. You have 60 days from the date you receive the distribution to deposit it into the new account.
• 20% withholding. A retirement plan distribution paid to you is subject to mandatory 20% federal income tax withholding, even if you plan to roll it over.

If the deadline is missed for reasons beyond your control, the IRS may waive the 60-day requirement in certain situations.

The steps, in order

1. Decide where the money is going. A new employer's plan or an IRA. If it is a plan, confirm that it accepts rollovers. If it is an IRA, open the account first.
2. Match the tax type. Pre-tax money generally goes to a traditional IRA or a pre-tax plan account. Roth 401(k) money generally goes to a Roth account. Moving pre-tax money into a Roth IRA is allowed, but the untaxed amount is included in your income for that year. The IRS rollover chart shows which moves are permitted.
3. Request a direct rollover from the old plan. The plan administrator will tell you what forms it needs and how the check or transfer should be addressed.
4. Confirm the deposit. Check that the full amount arrived in the new account and was recorded as a rollover, not as a new contribution.
5. Choose investments. Rolled-over money often arrives as cash. It stays in cash until you select investments in the new account.
6. Keep the paperwork. The old plan reports the distribution on Form 1099-R. A rollover is reportable on your federal tax return even when it is not taxable (IRS Topic 413).

What cannot be rolled over

Most distributions paid when you leave a job are eligible, but a few types are not. Examples include required minimum distributions, hardship distributions and payments that are part of a series of substantially equal periodic payments.

A note on the one-rollover-per-year rule

You may have heard that only one rollover is allowed every 12 months. That limit applies to indirect rollovers from one IRA to another. According to the IRS, it does not apply to plan-to-IRA or plan-to-plan rollovers, or to direct trustee-to-trustee transfers.