Rollover
A rollover is the movement of retirement-plan assets from one tax-advantaged account to another (e.g., 401(k) to IRA, IRA to IRA, 403(b) to 401(k)) without triggering current taxation. Two main mechanics: direct (trustee-to-trustee) rollovers and 60-day rollovers — with markedly different rules and risks.
Direct rollovers are the dominant mechanism for moving retirement assets. The funds transfer directly between custodians; the participant never receives or controls the proceeds. No withholding occurs, no tax event, no per-12-month limits. Direct rollovers are unlimited in frequency and apply across all the standard pairings: 401(k) → IRA, IRA → IRA, 401(k) → 401(k) (when accepted), 403(b) → IRA, etc. Same-type rollovers preserve tax character (pre-tax → pre-tax, Roth → Roth).
60-day rollovers are the alternative — and the riskier one. The participant takes a distribution to themselves; the funds arrive in their bank account; they have 60 calendar days to redeposit into a qualifying retirement account. From qualified plans (401(k) etc.), mandatory 20% withholding applies — meaning the participant must redeposit the gross amount, not the net amount they received, to fully accomplish the rollover. The Bobrow rule (Tax Court 2014, IRS Announcement 2014-32) limits 60-day rollovers to once per 12 months across all IRAs combined; multiple within the window cause subsequent attempts to fail.
Cross-type rollovers introduce additional rules. Pre-tax → Roth rollovers are taxable conversions (covered separately under Backdoor Roth). Roth → pre-tax rollovers are generally not allowed. Inherited IRAs cannot be rolled over by non-spouse beneficiaries — they must be moved as inherited IRAs to preserve their distinct distribution rules. Spouse beneficiaries can roll inherited IRAs into their own IRAs (a 'spousal rollover') under §408(d)(3)(C).
| Direct rollover | 60-day rollover | |
|---|---|---|
| Mechanism | Custodian-to-custodian | Distribution → redeposit |
| Mandatory withholding | None | 20% from qualified plans |
| Frequency limit | Unlimited | Once / 12 months across all IRAs |
| Risk profile | Low | High — missed deadline = taxation |
| Recommended for | Default for all rollovers | Last-resort only |
Synthetic households should track rollover history per account: source plan/IRA, destination, mechanism (direct vs 60-day), date, gross/net amounts. The 12-month Bobrow window must be enforceable across IRAs at the household level. Mandatory withholding on 60-day rollovers from qualified plans needs to be modeled (20% withheld; participant must redeposit gross to avoid taxable shortfall).
Common pitfalls
- Treating the once-per-12-months rule as per-IRA — Bobrow rejected this; the rule is taxpayer-wide.
- Forgetting 20% mandatory withholding on 60-day rollovers from 401(k) — must redeposit gross to fully complete the rollover.
- Letting non-spouse beneficiary roll inherited IRA into own IRA — not permitted; must move as inherited IRA.
- Missing the 60-day deadline — even a single day late triggers full taxation plus potential 10% early-withdrawal penalty.
Examples
Participant requests $50,000 rollover. Direct rollover: $50,000 transfers custodian-to-custodian, no withholding, no tax event. 60-day rollover: plan distributes $40,000 (after $10,000 mandatory federal withholding on the $50,000 gross). Participant must redeposit the full $50,000 within 60 days — including making up the $10,000 from other funds — to fully roll over. Net effect: 60-day method requires the participant to lay out $10,000 of additional cash to capture the full rollover.