What is a rollover?
A rollover is the transfer of your retirement money from one qualified, tax-deferred retirement program into another.

It’s the easiest way to maintain the tax-deferred status of your savings while you are still working. You can decide how your money is invested and your earnings continue to grow tax-deferred, just as they did in your previous retirement program. That can be a substantial advantage if the money stays in the account for a number of years.

Why a rollover?
Rolling over your money lets you maintain your assets’ tax-deferred status, allowing you to postpone paying taxes on the money until you withdraw it, hopefully in retirement when your tax bracket may be lower. If you don’t roll over the money directly, your employer or the administrator of your program is required by law to withhold 20 percent of your distribution for taxes. If you then decide within 60 days to roll over the full amount, you must make up that 20 percent with other assets. The 20 percent that was withheld will be credited to you when you file your tax return.

Rollover News in EGTRRA
In the summer of 2001, Congress passed a new tax bill—the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)—which contained significant changes to the rules governing tax-advantaged retirement savings programs. These rules took effect in 2002, but your ability to take advantage of some of them depends on when or if your program adopts them. Check your program rules and highlights for details.

In general, though, the 2001 tax legislation makes it easier to roll over your assets into another retirement program if you leave your current job. If your program’s rules permit, you can roll over pre-tax assets from a 401(k) program into a 403(b), and vice versa, without restriction—a flexibility that wasn’t permitted previously. It is now also easier to roll an existing individual retirement account into your 401(k) or 403(b).

Also, if you have between $1,000 and $5,000 in your retirement account when you leave an employer and you don’t make other arrangements, your employer may be required to roll the money into an individual retirement account in your name.  If you have less then $1,000, the employer may be permitted to distribute that money to you directly.

If your new program doesn’t allow rollovers, you have two other options that would allow you to maintain the account’s tax-deferred status.

1. If your vested account balance is $5,000 or more and you're under age 65, you can leave your money in your old retirement program—and taxes won't be due until you withdraw the money.
2. You can roll over your previous retirement account into a traditional IRA. If you do a direct rollover—have the money transferred directly into the new IRA— you won’t need to concern yourself with withholding taxes, which would otherwise be deducted from a distribution.

If your balance is less than $5,000 and more than $1,000, your employer may be required to automatically roll it into an IRA account on your behalf. If this occurs, there are no tax consequences because the money is moving from one tax-deferred account to another. If your balance is $1,000 or less, it may be automatically distributed to you in a lump sum and you will owe applicable taxes and penalties.