Rolling Over a 401(k) or 457(b): What You Need to Know

When you leave an employer or retire, you often have a decision to make about what happens to the money in your employer-sponsored retirement plan (401(k), 403(b), or 457(b)). One option is a rollover -- moving the funds to an IRA or another employer plan. This guide explains the concept at a high level. It is educational only and is not tax or investment advice.

What Is a Rollover?

A rollover is a transfer of retirement assets from one account to another without triggering taxes or penalties, as long as IRS rules are followed. The most common scenario is moving money from a former employer's 401(k) or 457(b) into an Individual Retirement Account (IRA).

Direct vs. Indirect Rollovers

• **Direct rollover**: The funds move directly from your old plan to the new account, with no check issued to you. This is the simplest method and avoids withholding.
• **Indirect rollover**: The plan issues a check to you, and you have 60 days to deposit the funds into a new retirement account. The plan may withhold 20% for taxes; you must replace that amount out of pocket to avoid it being treated as a taxable distribution. If you miss the 60-day deadline, the distribution becomes taxable and may incur a 10% penalty if you are under 59½.

Most advisors and plan administrators recommend direct rollovers to avoid these complications.

Why People Roll Over

Common reasons include:

• Consolidating multiple old 401(k) accounts into one IRA for simpler management
• Gaining access to a broader range of investment choices than the former employer plan offers
• Keeping retirement assets in a tax-advantaged account rather than cashing out

Considerations Before Rolling Over

Leaving money in a former employer plan or rolling it to a new employer plan may make sense in some cases -- for example, if the old plan has excellent low-cost investment options, or if you are between age 55 and 59½ and may need penalty-free access (a special rule for employer plans). A tax professional or financial advisor can help you compare your options.

Roth Conversions and Rollovers

You can roll over pre-tax money to a traditional IRA tax-free, or you can convert it to a Roth IRA by paying taxes on the amount converted. This is a separate decision from the rollover itself and has significant tax implications. Consult a tax advisor before converting.

This article provides only a conceptual framework. For questions about your specific situation, speak with a qualified tax professional or financial advisor.