David Lerner Associates: Rollovers

David Lerner Associates: Rollovers

Core Facts

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When evaluating whether to start a rollover always make sure to (1) inquire about possible surrender charges that might be enforced by your employer plan, or new abandonment charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.

Use this rollover guide to help you decide where you can move your retirement dollars. A financial professional can likewise help you browse the rollover waters. Keep in mind that employer plans are not legally required to accept rollovers. Review your plan document.

Some distributions can't be rolled over, including:

  • Required minimum distributions (to be taken after you reach age 70 1/2 or, sometimes, after you retire).
  • Specific annuity or installment payments.
  • Hardship withdrawals.
  • Corrective distributions of excess contributions and deferrals


According to David Lerner Associates, a rollover is the movement of funds from one retirement savings vehicle to another. You may want, or need, to make a rollover for any variety of factors-- your employment scenario has changed, you wish to switch investments, or you've received death benefits from your spouse's retirement plan. There are two possible ways that retirement funds can be rolled over-- the 60-day rollover and the trustee-to-trustee transfer.

The 60-day, or indirect, rollover

With this method, you actually receive a distribution from your retirement plan and then, to complete the rollover transaction, you make a deposit into the new retirement plan that you wish to receive the funds. You can make a rollover at any age, but there are specific rules that must be followed. Most notably, you must typically complete the rollover within 60 days of the date the funds are paid from the distributing plan.

If properly finished, rollovers aren't subject to income tax. But if you fail to finish the rollover or miss the 60-day deadline, all or some of your distribution may be taxed, and subject to a 10 % early distribution penalty (unless you're age 59 1/2 or another exception applies).

Additionally, if you receive a distribution from an employer retirement plan, your employer must withhold 20 % of the payment for taxes. This means that if you want to roll over your whole distribution, you'll need to develop that extra 20 % from your other funds (you'll be able to recover the withheld taxes when you file your tax return).

The direct rollover

The second kind of rollover transaction occurs right in between the trustee or custodian of your old retirement plan, and the trustee or custodian of your new plan. You never actually receive the funds or have control of them, so a trustee-to-trustee transfer is not treated as a distribution. Trustee-to-trustee transfers avoid both the danger of missing the 60-day deadline and, for employer plans, the 20 % withholding problem.

With employer retirement plans, a trustee-to-trustee transfer is usually referred to as a direct rollover. If you receive a distribution from your employer's plan that's eligible for rollover, your employer must give you the option of making a direct rollover to another employer plan or IRA.

A trustee-to-trustee transfer (direct rollover) is generally the safest, most efficient way to move retirement funds. Taking a distribution yourself and rolling it over makes sense only if you need to use the funds temporarily, and are certain you can roll over the full amount within 60 days.

Should you roll over money from an employer plan to an IRA?

In general, you can keep your money in an employer's plan until you reach the plan's normal retirement age (typically age 65). But if you terminate employment before then, should you keep your money in the plan (or roll it into your new employer's plan) or instead make a direct rollover to an IRA?

There are several reasons to consider making a rollover. In contrast to an employer plan, where your investment options are restricted to those selected by your employer, the universe of IRA investments is almost unlimited. Similarly, the distribution options in an IRA (especially for your beneficiary following your death) may be more versatile than the options available in your employer's plan.

On the other hand, your employer's plan may offer better creditor protection. In general, federal law protects your total IRA assets up to $1,245,475 (as of April 1, 2013) -- plus any amount you roll over from a qualified employer plan-- if you declare bankruptcy. (The laws in your state may provide additional protection.) In contrast, assets in an employer retirement plan generally enjoy unlimited protection from creditors under federal law, regardless of whether you've declared bankruptcy.

  1. Required distributions and no spousal death benefits can't be rolled over.
  2. In general, if you make a tax-free rollover from a traditional IRA, you can't make another tax-free rollover from that same IRA for one year. This does not concern direct (trustee-to-trustee) rollovers.
  3. Taxable conversion.
  4. Nontaxable conversion.
  5. Only after employee has taken part in SIMPLE IRA plan for two years.
  6. Required distributions, certain periodic payments, hardship distributions, corrective distributions, and certain other payments cannot be rolled over; no spousal death benefits can be rolled over only to an inherited IRA, and only in a direct rollover.
  7. May result in loss of qualified plan lump-sum averaging and capital gain treatment.
  8. Direct (trustee-to-trustee) rollover only; receiving plan must separately account for the after-tax contributions and earnings.
  9. 457(b) plan must separately account for rollover-- 10 % penalty on payout may apply.
  10. Nontaxable dollars may be transferred only in a direct (trustee-to-trustee) rollover.
  11. Taxable dollars included in income in the year rolled over.
  12. 401(k), 403(b), and 457(b) plans can also allow participants to roll over (convert) eligible rollover distributions of non-Roth funds to Roth if certain requirements are met.


Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.




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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates Cal 516-921-4200 Visit our website: http://www.davidlerner.com

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