Rollovers from Employer-Sponsored Retirement Plans

In general

If you withdraw cash or other assets from an employer-sponsored retirement plan (“employer plan”) in an “eligible rollover distribution,” (defined below) you can defer paying tax on the distribution by rolling all or part of it over to another employer plan or to a traditional IRA. You don’t include the amount rolled over in your income until you receive it in a distribution from the recipient plan or IRA.

You can also roll all or part of your distribution to a Roth IRA. You’ll pay income tax on the taxable portion of your distribution at the time of the rollover, but qualified distributions from the Roth IRA are free from federal income taxes.

Special rules apply to distributions from designated Roth 401(k), Roth 403(b), and Roth 457(b) accounts. See “Roth Accounts and Roth IRAs” below.

Rollovers from employer plans generally take one of four forms:

  1. A transfer from your employer plan directly to an IRA trustee/custodian (this is a type of direct rollover)
  2. A transfer from your employer plan to you, and then, within 60 days, from you to an IRA trustee/custodian (this is a type of indirect rollover)
  3. A transfer from your employer plan directly to the trustee of the retirement plan at a new employer (this is a type of direct rollover)
  4. A transfer from your employer plan to you, and then from you to the trustee of a retirement plan at a new employer (this is a type of indirect rollover)

Eligible rollover distributions are typically paid from defined contribution plans. A defined contribution plan is a retirement plan in which contributions are based on a set formula (e.g., a percentage of the employee’s pretax compensation), while the payout is based on total contributions and investment performance. The 401(k) plan is the most common type of defined contribution plan. However, you may also roll over a distribution you receive from a defined benefit plan if the distribution qualifies as an eligible rollover distribution.

If you were born before 1936, and you receive a lump sum distribution from your employer plan, your distribution may be eligible for special tax treatment which may be lost if you roll all or part of your distribution over to an IRA. Consult a tax professional.

Special rules may apply to employer plan distributions received by qualified individuals who are affected by certain presidentially-declared natural disasters, and repayment of qualified reservist distributions.

What is an eligible rollover distribution?

An “eligible rollover distribution” is a distribution of all or part of your account balance in an employer plan, except:

  1. Required minimum distributions
  2. Hardship withdrawals
  3. Certain periodic payments. You cannot roll over any of a series of substantially equal distributions paid at least once a year over:
    • Your lifetime or life expectancy
    • The joint lives or life expectancies of you and your beneficiary, or
    • A period of 10 years or more
  4. Corrective distributions of excess contributions, excess deferrals, or excess annual additions (and any income allocable to these distributions)
  5. An employer plan loan that has been treated as a distribution because it exceeds the allowable loan limit, that’s in default due to missed payments, or that fails to satisfy certain other requirements
  6. Dividends on employer securities
  7. The cost of life insurance coverage paid by the plan
  8. Contributions made under special automatic enrollment rules that are withdrawn pursuant to your request within 90 days of enrollment

Both in-service withdrawals and distributions following termination of employment may be rolled over if the distribution qualifies as an eligible rollover distribution.

If your distribution is an eligible rollover distribution, your plan administrator must send you a timely notice (a “402(f) notice”) explaining the rollover rules, the withholding rules, and other related tax issues.

Special rollover rules apply to the nontaxable portion of your eligible rollover distribution (for example, amounts attributable to your non-Roth after-tax contributions). See “Rollover of nontaxable amounts,” below.

Which plans must allow rollovers?

Certain employer plans must allow you to make a direct rolloverfrom the plan. These are:

  • Qualified employer-sponsored retirement plans (for example, 401(k) and profit-sharing plans)
  • Qualified Section 403(a) annuities
  • Section 403(b) plans
  • Governmental Section 457(b) plans

You may also make indirect rollovers of distributions from these plans. For purposes of this article, when we refer to “employer plans” or “employer-sponsored retirement plans,” we are referring to the plans listed above.

While simplified employee pension plans (SEPs) and SIMPLE IRA plans are employer-sponsored plans, they are IRA based, and rollovers of distributions from those plans are generally governed by the rules applicable torollovers from traditional IRAs.

While an employer plan generally must allow direct rollovers to be made from the plan, it does not have to allow rollovers to be made into the plan. If you want to make a rollover into a new employer plan, check with the plan administrator to determine if your new plan accepts rollovers.

An employer plan does not have to allow you to make a direct rollover to certain defined benefit plans. However, you can make an indirect rollover if the defined benefit plan accepts rollovers.

Which plans can receive rollovers?

In general, you can roll over a distribution from an employer plan into an “eligible retirement plan.” An eligible retirement plan is an employer plan, a traditional IRA, or a Roth IRA.

You cannot roll funds over from an employer plan to a SIMPLE IRA.

Distributions from governmental Section 457(b) plans are generally not subject to the 10 percent premature distribution tax. A Section 457(b) plan can receive a rollover from a plan that is subject to the 10 percent penalty tax only if the Section 457(b) plan agrees to separately account for that rollover. This is because the amount rolled over, and any allocable earnings, will continue to be subject to the 10 percent penalty upon distribution from the Section 457(b) plan (unless an exception applies at the time of payout).

An employer plan is not required to allow rollovers into the plan. In addition, if your retirement plan distribution includes assets other than cash (such as employer securities), your IRA trustee or the new plan trustee may, but isn’t required to, accept those assets as part of a rollover.

Special rules apply to distributions from designated Roth 401(k)/403(b)/457(b) accounts. In general, distributions from these accounts can only be rolled over to a Roth IRA, or to another designated Roth account. See “Roth Accounts and Roth IRAs,” below.