Why a careful rollover matters

Rolling over an old employer plan is often a smart move: it can reduce fees, simplify account management, preserve tax-deferred growth, and open different investment choices. But mistakes during a rollover can produce avoidable tax bills, penalties, or loss of creditor protection. This guide gives a step‑by‑step checklist, explains tax-reporting consequences, highlights common exceptions, and points to professional resources.

Quick checklist (one-page summary)

  • Compare leaving funds in the old plan vs moving to a new employer plan or IRA.
  • Choose a direct (trustee-to-trustee) rollover whenever possible.
  • If you receive a distribution (indirect rollover), plan for 20% federal withholding and redeposit the full amount within 60 days to avoid tax.
  • Verify account types (pre-tax, Roth, after-tax) and where they can roll.
  • Confirm beneficiary designations on the receiving account.
  • Keep paperwork and watch for Form 1099‑R and Form 5498 in tax season.

Step-by-step: How to roll over without tax pitfalls

  1. Inventory your accounts and objectives
  • List balances, plan types (401(k), 403(b), governmental plans), Roth or pre-tax subaccounts, and outstanding loans.
  • Decide your goals: lower fees, broader investments, consolidation, creditor protection, or Roth conversion.
  1. Compare options
  • Old employer plan: may have low-cost institutional funds or strong creditor protection under ERISA.
  • New employer plan: may accept rollovers and allow loans; check plan rules.
  • Rollover IRA: usually broader investment choices; less ERISA creditor protection than an employer plan.
  • Use side-by-side fee and investment comparison. Don’t assume a rollover is automatically better.
  1. Prefer a direct rollover (trustee-to-trustee transfer)
  • In a direct rollover, the old plan sends the funds straight to the new custodian; no withholding occurs and the distribution is not taxable.
  • Ask your plan administrator for a direct rollover form or online instruction. Confirm the receiving account’s name, type, and account number.
  • Example: ‘‘Please send a direct rollover from Plan X to Custodian Y, Account #12345, for a rollover to a Traditional IRA.’’
  1. If an indirect rollover happens, act quickly
  • The plan administrator will withhold 20% for federal income tax on non-Roth distributions. You must redeposit the full distribution (including the withheld 20%) within 60 days to avoid taxation and potential early withdrawal penalties.
  • If you don’t have the withheld amount, you can still move the net proceeds, but the withheld portion is treated as a distribution and will be taxable (and possibly penalized if you’re under age 59½).
  1. Watch Roth and after-tax subaccounts
  • Roth 401(k) balances rolled to a Roth IRA are generally tax-free.
  • Rolling pre-tax funds to a Roth IRA is a conversion; you’ll owe income tax on the converted amount in that tax year. Consider spreading conversions across years if the tax hit is large.
  • Some plans hold after-tax contributions that can be rolled to a Roth IRA or to an IRA that preserves separate basis — confirm plan rules.
  1. Special rules: RMDs, employer stock (NUA), and governmental plans
  • Required Minimum Distributions (RMDs) cannot be rolled over. If you’ve begun RMDs, the portion that is an RMD must be taken and cannot be moved.
  • If your distribution includes employer stock, consider Net Unrealized Appreciation (NUA) rules for potentially favorable tax treatment; consult a professional before taking a lump-sum distribution.
  • Governmental plans and certain public-sector arrangements have unique rollover rules.
  1. Confirm tax reporting and keep records
  • Expect Form 1099‑R from the distributing plan. If you did a direct rollover, the 1099‑R should show a distribution code that indicates a rollover; it will generally show zero taxable amount.
  • Expect Form 5498 from the receiving IRA custodian reporting rollover contributions (these are often issued after the tax filing season).
  • Keep all confirmations, dated forms, and communications for at least seven years in case of an IRS question.

Common mistakes and how to avoid them

  • Taking the cash (indirect rollover) without planning for the 20% withholding: always prefer direct rollovers.
  • Missing the 60‑day redeposit deadline: if you may need time, initiate a direct transfer instead of an indirect check.
  • Ignoring plan rules for after-tax and Roth balances: verify where each subaccount can roll.
  • Forgetting to update beneficiary designations on the receiving account.
  • Treating IRAs and employer plans as identical: IRAs generally lack ERISA protections and have different creditor treatment.

Tax forms and reporting you should expect

  • Form 1099‑R: The distributing plan sends this to you and the IRS reporting the distribution amount and rollover code.
  • Form 5498: The receiving IRA custodian reports the rollover contribution amount to the IRS (often filed after April 15).
  • If you convert to a Roth, you’ll owe income tax on the converted amount; report it on your tax return.

Exceptions and special circumstances

  • One-rollover-per-12-month rule: IRS rules limit the number of 60‑day rollovers among IRAs to one per 12‑month period for each IRA owner. Trustee-to-trustee transfers and direct rollovers are not subject to this limit. (See IRS guidance on rollovers.)
  • Hardship or administrative waivers: The IRS recognizes limited exceptions to the 60‑day rule in specific circumstances (e.g., errors by a plan or financial institution). Documentation is required.

When to consider professional help

  • Large balances with employer stock where NUA rules may apply.
  • Converting substantial pre-tax balances to Roth IRAs that could push you into a higher tax bracket.
  • Complex situations involving multiple plans, pensions, or public-sector rules.

Sample scripts and next steps

  • To your old plan administrator: ‘‘I’d like to request a direct trustee-to-trustee rollover of my pre-tax 401(k) to [Custodian Name], Account #____. Please send any required forms and the expected timeline.’’
  • To your new custodian: ‘‘Please confirm you can accept a rollover from [Old Plan], advise on the preferred transfer code, and provide any account setup steps.’’

Links to related guidance and internal resources

  • For the technical differences between rollout methods, see our guide on direct vs indirect rollovers: Direct and Indirect Rollovers.
  • If you’re specifically handling a 401(k) rollover, review: 401(k) Rollover.
  • For IRA-centered rollover strategies and managing multiple IRAs, see: Rollover IRA.

Authoritative sources and further reading

Final thoughts and professional disclaimer

Handled correctly, a rollover helps preserve retirement savings and avoid unnecessary taxes or penalties. In my practice as a CFP® and CPA, I’ve seen that most avoidable tax mistakes come from using indirect rollovers or failing to account for Roth vs pre-tax distinctions. This article provides general information and examples; it is not individualized tax or investment advice. Consult a qualified tax advisor or financial planner before executing large or complex rollovers.

Last reviewed: 2025.