How do rollovers work and what rights do you have as a plan participant or borrower?

Rollovers move retirement savings from one qualified account to another without triggering immediate taxes, when done correctly. There are two common rollover methods:

  • Direct rollover (trustee-to-trustee): The plan sends money directly to the receiving account. This is the safest option and usually avoids taxes and withholding.
  • Indirect rollover (60‑day rollover): The plan pays you, and you have 60 days to deposit the full amount into another eligible retirement account to avoid taxes and penalties. Employer plans commonly withhold 20% for federal income tax on eligible rollover distributions—if you want to avoid that withholding, choose a direct rollover. (IRS: Rollovers of Retirement Plan and IRA Distributions)

In addition, remember the IRA one-rollover-per-12-months rule: indirect (60‑day) rollovers between IRAs are limited to one per 12-month period per individual; trustee-to-trustee transfers are not subject to this limit. These rules are enforced by the IRS, so plan accordingly (IRS: Rollovers of Retirement Plan and IRA Distributions).

Below I walk through the key rules, common mistakes, and the specific rights you have as someone rolling over accounts or as a borrower who has taken a loan from a retirement plan.

Key rules and tax consequences (what to watch for)

  • 60‑day deadline: If you receive funds directly, you generally must complete the rollover within 60 days to avoid taxation and, possibly, a 10% early withdrawal penalty if under age 59½. (IRS)
  • Withholding on indirect rollovers: Employer plans must generally withhold 20% for federal income tax on eligible rollover distributions that you receive, even if you intend to roll the funds over. If you complete a rollover, you must replace the withheld amount from other funds to avoid the withheld portion becoming a taxable distribution. (IRS)
  • RMDs: Required minimum distributions (RMDs) for those subject to them cannot be rolled over. Make sure you take and report RMDs as required. (IRS Publication 590-B)
  • Roth vs. pre-tax: Rolling pre-tax plan money into a Roth IRA is a Roth conversion and is taxable in the year of conversion. Rolling Roth-designated plan money into a Roth IRA usually preserves tax-free growth but follow plan and IRS rules.
  • Loans and rollovers: Outstanding 401(k) loans usually cannot be rolled into an IRA. If you leave the employer and do not repay the loan, it may be treated as a distribution (taxable and possibly penalized).

Authoritative source: IRS — “Rollovers of Retirement Plan and IRA Distributions” (https://www.irs.gov/retirement-plans/rollovers-of-retirement-plan-and-ira-distributions).

Rights you have as a plan participant (and how they protect your rollover)

As a participant in an employer-sponsored plan, federal rules and plan terms give you specific rights that make rollovers and account moves safer when you assert them:

  • The right to a direct rollover when you separate from service. You can generally request that your plan transfer the eligible rollover distribution directly to an IRA or another qualified plan, avoiding mandatory withholding and lowering immediate tax risk. (IRS)
  • The right to clear fee and investment information. You can and should request written disclosures about fees, investment options, and any account transfer costs before moving funds. Plans are required to provide plan information on request. (Department of Labor and plan fiduciary rules)
  • The right to plan documents and explanation of distribution options. Your plan must let you see documents that explain distribution choices, including whether rollovers are allowed and any restrictions.
  • The right to appeal or dispute plan actions. If something goes wrong—e.g., a rollover payment was misdirected—you have administrative remedies via the plan’s claims process and, if necessary, a right to sue under ERISA after exhausting internal remedies.

In practice: In my work advising clients, opting for a direct rollover and asking for written confirmation from both plan administrators reduced errors and saved clients from unexpected tax withholdings.

Rights and risks specific to borrowers (401(k) loans)

Many retirement plans allow participants to borrow against their 401(k). If you are or were a borrower, know these protections and pitfalls:

  • Right to clear loan terms: You should receive written terms that spell out the loan balance, interest rate, repayment schedule, and consequences of missed payments.
  • Repayment obligation at separation: If you leave your job, outstanding plan loans may become due. Most plans give a short window to repay; if you don’t, the outstanding balance may be treated as a taxable distribution, subject to income tax and possibly the 10% early withdrawal penalty. (IRS guidance)
  • Right to alternative payment options: Some plans may allow hardship or in-service distributions; others may offer a rollover of a loan offset only in limited circumstances. Always ask the plan administrator for how loans are handled on separation.
  • Protection from predatory rollover tactics: For non-retirement small-dollar loans (payday lending), borrowers face rollover traps and compounding fees. Different protections apply; see consumer-focused resources. (Consumer Financial Protection Bureau)

Note: Loans are fundamentally different from rollovers. You cannot roll a 401(k) loan into an IRA; you must repay loans or accept the tax consequences if the plan treats the outstanding balance as a distribution.

Relevant consumer resource: Consumer Financial Protection Bureau — general consumer protections and guidance about loans (https://www.consumerfinance.gov).

Practical checklist before you roll funds

  1. Choose a direct (trustee-to-trustee) rollover whenever possible to avoid 20% mandatory withholding and reduce error risk.
  2. Confirm whether your distribution is eligible for rollover and whether any portion (like after‑tax contributions) has special rules.
  3. Check the 60‑day rule and the one‑per‑12‑month indirect rollover limit for IRAs.
  4. Request written fee and transfer disclosures from both the sending and receiving institutions.
  5. If you have a plan loan, get the repayment/offset policy in writing; consider repaying the loan before you leave the employer if you can.
  6. Keep documentation: plan notices, transfer confirmations, Form 1099‑R, and IRA deposit records.

Common mistakes and how to avoid them

  • Treating an indirect rollover casually: If a plan sends you a check and withholds taxes, you must replace the withheld funds within 60 days to avoid taxation on that portion.
  • Forgetting the IRA one-rollover‑per‑year limit: Use trustee-to-trustee transfers where frequent movement is needed.
  • Rolling after-tax or Roth-designated funds without checking tax consequences: Some rollovers require special handling to preserve after-tax basis or Roth status.
  • Ignoring outstanding loans: Leaving an employer without handling an outstanding 401(k) loan can convert the balance into a taxable distribution.

Examples (real-world scenarios)

  • Direct rollover to IRA: Jane leaves her employer and requests a direct rollover of her 401(k) to a traditional IRA. The plan sends the funds to the IRA custodian directly; no taxes are withheld, and the rollover is not reported as a taxable distribution.

  • Indirect rollover with withholding: Tom receives a $50,000 check from his plan. The plan withholds $10,000 (20%) for taxes. To avoid taxes on the full amount, Tom must deposit the full $50,000 into an IRA within 60 days; to do that, he needs to come up with the $10,000 withheld from other sources. Otherwise, the withheld $10,000 is treated as a taxable distribution.

  • Loan becomes taxable: Maria had a $5,000 outstanding loan when she left her employer. She did not repay. The plan treated the unpaid $5,000 as a distribution; she received a Form 1099‑R and must report it as income on her tax return, potentially incurring a penalty if under age 59½.

Where to get help and next steps

  • Read the IRS rollover guidance before you act: https://www.irs.gov/retirement-plans/rollovers-of-retirement-plan-and-ira-distributions
  • Ask your plan administrator for written rollover options, fee disclosures, and loan policies.
  • For consumer protections and small-dollar loan concerns, consult the CFPB: https://www.consumerfinance.gov
  • Consider talking with a fiduciary financial advisor or tax professional before making decisions that could have tax consequences. In my practice, even a short advisor review before a rollover prevents costly mistakes and preserves long-term retirement security.

Further reading on FinHelp: see our detailed guides on IRA rollovers — rules, taxes, and best practices and how to move old 401(k)s safely.

Professional disclaimer: This article is educational and does not substitute for personalized legal, tax, or financial advice. Rules for rollovers and loans can be complex and change; consult a qualified tax advisor or plan fiduciary for decisions tailored to your situation.