Overview

An IRA rollover is a common tool for consolidating retirement accounts, changing custodians, or converting pre-tax funds to Roth status. Done correctly, rollovers preserve tax-deferred growth. Done incorrectly, they generate ordinary income, penalties, and unexpected tax withholdings.

This guide covers the mechanics, the IRS rules that matter in 2025, real-world examples, and a practical checklist you can use before moving any money. For the most authoritative guidance, see the IRS page on rollovers (IRS: Retirement Plans: Rollovers) and Pub. 590-A/B on IRA contributions and distributions (links below).

Sources: IRS — Retirement Plans: Rollovers (https://www.irs.gov/retirement-plans/rollovers); IRS Publication 590-A and 590-B (https://www.irs.gov). Consumer Financial Protection Bureau — rollovers overview: https://www.consumerfinance.gov/consumer-tools/retirement/rollovers/

Types of rollovers and how each works

  • Direct rollover (trustee-to-trustee transfer): The plan/custodian moves the funds directly to the receiving IRA or plan. This avoids mandatory withholding and is the cleanest, safest method. (Recommended whenever possible.)

  • Indirect rollover (60-day rollover): The payor sends the distribution to you. You have 60 calendar days to redeposit the full distribution into another qualified account to avoid taxation. If the distribution came from an employer plan (e.g., 401(k)), the plan is required to withhold 20% for federal taxes on an eligible rollover distribution — you must replace that withheld amount when you complete the rollover or the withheld portion becomes taxable. (IRS: Retirement Plans: Rollovers)

  • Trustee-to-trustee vs. employer plan rules: The one‑per‑12‑month limitation applies only to IRA-to-IRA indirect rollovers, not to direct transfers and not to rollovers from employer plans to IRAs. That means you can do unlimited direct transfers and unlimited rollovers via employer plan rollovers, but you cannot do more than one indirect (60-day) rollover between IRAs in any 12-month period (see IRS guidance).

Key IRS rules and tax consequences (short checklist)

  • 60-day rule: You have 60 days after receiving a distribution to roll it over to an eligible retirement plan to avoid taxation. (IRS: 60-day rollover rule)

  • One-rollover-per-12-month rule: You may make only one IRA-to-IRA rollover using the indirect (60-day) method during any 12-month period across all your IRAs. Direct transfers are not counted. (IRS)

  • Mandatory 20% withholding: If you take an indirect distribution from a 401(k) or other employer plan, the payer generally must withhold 20% for federal income tax. If you want to roll over the full amount, you must make up the withheld 20% from other funds when you redeposit. Otherwise, the withheld amount is taxable and may be subject to penalty if you’re under 59½. (IRS)

  • RMDs cannot be rolled over: Required minimum distributions (RMDs) for the year are not eligible for rollover. If you’re taking RMDs, plan transfers need coordination. (IRS Pub. 590-B)

  • Roth conversions: Moving pre-tax account dollars into a Roth IRA is a conversion and is taxable in the year of conversion. Rolling Roth-designated employer-plan money to a Roth IRA is generally tax-free if amounts are already after-tax; converting pre-tax amounts will trigger ordinary income tax on the converted portion. (IRS Pub. 590-A)

  • No dollar limit: There is no cap on the dollar amount you can rollover, but tax rules above still apply.

Example scenarios (numbers matter)

1) Direct rollover from 401(k) to traditional IRA

  • Balance: $50,000
  • Action: Trustee-to-trustee direct transfer
  • Result: Full $50,000 moves; no withholding; retains tax-deferred status.

2) Indirect rollover from 401(k) to IRA (without replacing withholding)

  • Balance: $50,000 distribution issued to you
  • Plan withholds 20%: $10,000 withheld and sent to IRS
  • You redeposit $40,000 within 60 days
  • Tax result: $10,000 is treated as distribution and taxed as ordinary income; additional 10% early-withdrawal penalty may apply if under 59½ unless an exception applies.

3) Converting traditional IRA to Roth IRA

  • Balance converted: $30,000
  • Tax result: Entire $30,000 added to taxable income in year of conversion; use tax-bracket planning to minimize bite.

These examples closely reflect common outcomes I see advising clients: direct transfers avoid surprises; indirect rollovers create a frequent trap around the 20% withholding and the one‑per‑12‑month rule.

Practical step-by-step: safe direct rollover (recommended)

  1. Decide the target account type (traditional IRA, Roth IRA, or qualified plan).
  2. Contact the receiving custodian and open the account if needed. Ask for their exact rollover instructions and the name on the check.
  3. Request a trustee-to-trustee transfer from the sending plan/custodian. Insist the check be made payable directly to the receiving IRA (e.g., “Fidelity as custodian for John Doe IRA”) rather than to you.
  4. Confirm with both custodians when funds are sent and received. Keep transaction confirmations and any paperwork.
  5. Verify tax reporting: you’ll receive Form 1099-R from the distributing plan; the receiving custodian will issue Form 5498 reporting the rollover contribution.

In my practice I tell clients to never accept a distribution made payable to them unless they clearly understand the 60-day rule and have the cash to replace any withholding.

Common mistakes and how to avoid them

  • Relying on an indirect rollover and missing the 60-day deadline. Solution: choose a direct transfer.

  • Forgetting the one‑per‑12‑month IRA rule. Solution: plan timing and use direct transfers for frequent moves.

  • Not planning for taxes on Roth conversions. Solution: do conversions with tax planning — consider spreading conversions across years.

  • Rolling over RMDs. Solution: don’t attempt to roll over any RMD amount; take it and account for it.

Documentation and tax reporting

  • Form 1099-R: The distributing plan reports the distribution; check the distribution code box to understand whether the distribution was eligible for rollover.
  • Form 5498: The receiving IRA custodian reports rollovers and contributions, often filed after the tax year ends.
  • Keep notes: retention of email confirmations, statements, and the rollover paperwork will speed any audit or IRS inquiry resolution.

When to consider alternatives

  • Keep a retirement plan open at a former employer if the plan offers outstanding investments or low fees. Not every job change requires an immediate rollover.
  • If you’re considering a Roth conversion, compare current vs. expected future tax rates and the impact on Medicare premiums, Social Security taxation, and eligibility for tax credits. See our guide on Roth vs. Traditional IRAs: Making the Right Choice.
  • If you have multiple IRAs, consolidation can simplify recordkeeping. Read Strategies for Managing Multiple IRAs for tradeoffs and fee considerations.

If you’re exploring after-tax strategies or using Roth options, the backdoor Roth is a related technique; learn more: Backdoor Roth IRAs: How They Work.

Quick checklist before you roll

  • Confirm whether a direct trustee-to-trustee transfer is possible.
  • If indirect, confirm you can meet the 60-day requirement and replace withheld taxes if needed.
  • Check whether the money is eligible for rollover (RMDs are not).
  • Understand tax consequences for conversions and whether the rollover will trigger reporting.
  • Keep copies of 1099-R and 5498 and reconcile them at tax time.

Final notes and professional disclaimer

In my 15+ years advising people on retirement account moves, the most reliable rule is: prefer direct transfers. They remove withholding surprises and avoid the one-per-year indirect rollover trap.

This article is educational and does not constitute tax or investment advice for your specific situation. For personalized guidance, consult a CPA or qualified financial advisor.

Authoritative resources: