The rules for a retirement plan rollover set out which accounts can transfer to which, who is allowed to move the money, how fast it has to land in the new account, and how often you can do it. Get every piece right and the transfer is tax-free. Get one piece wrong and the IRS treats the whole amount as a taxable distribution, often with a 10% early withdrawal penalty stacked on top. The safest path for almost everyone is a direct trustee-to-trustee transfer between compatible plan types; the rules below explain what “compatible” means and where the traps sit for anyone who can’t or won’t use a direct transfer.
Which Plans Can Roll Into Which
The Internal Revenue Code lets you move funds among a defined set of tax-advantaged accounts: qualified employer plans under 26 U.S.C. § 401(a) (including 401(k)s, profit-sharing plans, and defined benefit pensions), § 403(a) annuity plans, § 403(b) tax-sheltered annuities, governmental § 457(b) deferred compensation plans, and the IRA family (traditional, Roth, SEP, and SIMPLE).1Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
Not every account can feed every other account. The IRS publishes a rollover chart that maps the permitted combinations, and checking it before you sign anything is the single easiest way to avoid an expensive mistake.2Internal Revenue Service. Rollover Chart A traditional IRA, for example, can roll into a 401(k), a 403(b), a governmental 457(b), a SEP-IRA, or another traditional IRA. A Roth IRA can only roll into another Roth IRA.
Pre-Tax and Roth Don’t Mix Freely
The trickiest compatibility question is the pre-tax versus Roth line. The default rule is that pre-tax money stays pre-tax and Roth money stays Roth.
Funds in a designated Roth account (a Roth 401(k), Roth 403(b), or Roth 457(b)) can only move into a Roth IRA or another designated Roth account. They cannot go into a traditional IRA, a SEP-IRA, or any pre-tax employer plan.2Internal Revenue Service. Rollover Chart The tax was already paid on those contributions going in, and the IRS won’t let you route them into an account where they would be taxed again coming out.
The reverse direction is allowed but expensive: pre-tax funds from a traditional IRA, 401(k), 403(b), or governmental 457(b) can be rolled into a Roth IRA, but the entire pre-tax amount becomes taxable income in the year of the conversion.3Internal Revenue Service. Retirement Plans FAQs Regarding IRAs There’s no age penalty for a Roth conversion, but the income tax bill on a large balance can be significant.
If your employer plan holds after-tax contributions (not the same as Roth), you can split the distribution: the pre-tax portion goes to a traditional IRA, and the after-tax portion goes to a Roth IRA. Earnings on the after-tax contributions travel with the pre-tax side.4Internal Revenue Service. Rollovers of After-Tax Contributions in Retirement Plans
Distributions You Cannot Roll Over
Some distributions are permanently ineligible for rollover regardless of what you’d prefer to do with them. The plan administrator should flag these, but the tax consequences fall on you.
Required minimum distributions. Once you reach age 73, you must withdraw a minimum amount each year, and RMDs cannot be deposited into another tax-advantaged account. If you take a distribution in a year when an RMD is due, the RMD comes out first; only the amount above it is eligible for rollover.5Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
Hardship distributions. Withdrawals taken from a 401(k) or similar plan for immediate and heavy financial need cannot be repaid to the plan or rolled into any other account.6Internal Revenue Service. Retirement Topics – Hardship Distributions
Substantially equal periodic payments made at least annually over your life expectancy, joint life expectancies with a beneficiary, or a period of ten years or more; corrective distributions that fix excess contributions or excess deferrals; and most defaulted loan offsets are also excluded under 26 U.S.C. § 402(c)(4).7Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
Direct Rollovers vs. Indirect Rollovers
Federal law recognizes two ways to move the money, and the risk profiles are very different.
In a direct rollover, the plan administrator sends the funds straight to the receiving plan or IRA. The check, if there is one, is made out to the receiving institution for your benefit, not to you personally. No federal income tax is withheld.8Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions This is the cleanest option and the one that causes the fewest problems.
In an indirect rollover, the plan pays the funds to you, and you then have 60 days to deposit them into an eligible plan or IRA. Here’s the trap: when an employer plan (not an IRA) pays an eligible rollover distribution directly to you, it must withhold 20% for federal income taxes.9Office of the Law Revision Counsel. 26 USC 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income The withholding happens whether or not you intend to roll the money over.
The math is unforgiving. If your plan distributes $50,000 and withholds $10,000, you receive $40,000. To make the rollover tax-free, you have to deposit the full $50,000 into the new account within 60 days, covering the $10,000 out of your own pocket. You’ll get the withheld amount back as a refund when you file, but you need the cash up front. Deposit only the $40,000 you actually received, and the missing $10,000 is a taxable distribution, plus a 10% early withdrawal penalty if you’re under 59½.8Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
IRA-to-IRA indirect rollovers work slightly differently. The IRA custodian isn’t required to withhold 20%, though you can elect voluntary withholding. The 60-day deadline still applies.
The 60-Day Deadline and When It Can Be Waived
The 60-day clock starts on the day you receive the distribution. Deposit the full amount into an eligible plan or IRA by day 60 and the transaction is tax-free. Miss the deadline and the entire amount becomes taxable, plus the 10% early withdrawal penalty if you’re under 59½ and no exception applies.10Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Under Revenue Procedure 2016-47, you can self-certify a late rollover if a qualifying reason kept you from meeting the deadline. Accepted reasons include financial institution error, a lost distribution check, a misplaced deposit into the wrong type of account, severe damage to your principal residence, death or serious illness in your family, incarceration, foreign country restrictions or postal errors, and delays in getting information the receiving plan needed.11Internal Revenue Service. Waiver of 60-Day Rollover Requirement (Rev Proc 2016-47)
The IRS must not have already denied a waiver for the same distribution, and you must complete the rollover within 30 days after the qualifying reason stops preventing you from acting. Self-certification is done by sending a letter to the receiving plan or IRA. The IRS can review and reject the certification on audit, so it’s a safety net rather than a guaranteed pass.
One Indirect IRA Rollover Every 12 Months
If you take an indirect rollover from an IRA, you’re limited to one such rollover in any 12-month period, and the IRS treats all your IRAs (traditional, Roth, SEP, and SIMPLE) as a single IRA for this count.8Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions A second indirect IRA rollover inside 12 months is a taxable distribution.
Worse, the amount you deposited into the receiving IRA is treated as an excess contribution, subject to a 6% excise tax every year it stays in the account.
Several transactions are exempt from this limit and don’t burn your one allowance:
- Trustee-to-trustee transfers between IRA custodians (they don’t count as rollovers at all).
- Roth conversions.
- Rollovers from an employer plan to an IRA, or from an IRA into an employer plan.
- Rollovers between employer-sponsored plans.
The practical takeaway: if you use a direct trustee-to-trustee transfer to move IRA funds, this rule never comes into play.
Special Situations
Inherited Accounts
A surviving spouse who inherits retirement plan assets has essentially the same options as the original participant. The spouse can roll the funds into their own IRA (which resets RMD scheduling based on the spouse’s age) or transfer them into an inherited IRA. Both direct and 60-day rollovers are available.12eCFR. 26 CFR 1.402(c)-2 – Eligible Rollover Distributions
A non-spouse beneficiary faces much tighter rules. They cannot roll inherited funds into their own IRA. The only permitted move is a direct trustee-to-trustee transfer into an inherited IRA titled in the deceased participant’s name with the beneficiary listed as such.13Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust – Section 402(c)(11) The 60-day indirect rollover is not available to non-spouse beneficiaries at all. If the plan cuts a check payable to the individual, the entire amount becomes taxable income, and there is no way to undo it.12eCFR. 26 CFR 1.402(c)-2 – Eligible Rollover Distributions
A spouse or former spouse who receives plan assets through a Qualified Domestic Relations Order in a divorce can roll the funds over with the same options as the participant.14Internal Revenue Service. Retirement Topics – QDRO Qualified Domestic Relations Order
SIMPLE IRAs in the First Two Years
During your first two years of participating in a SIMPLE IRA, you can only roll SIMPLE IRA funds into another SIMPLE IRA. Moving them into a traditional IRA, a 401(k), or any other non-SIMPLE plan during that window triggers income tax on the distribution and a 25% early withdrawal penalty, not the usual 10%.15U.S. Department of Labor. SIMPLE IRA Plans for Small Businesses After two years, SIMPLE IRA funds can go anywhere the rollover chart permits.
Employer Stock and Net Unrealized Appreciation
If your employer plan holds company stock that has appreciated significantly, rolling everything into an IRA may cost you money. A special rule for net unrealized appreciation lets you distribute the employer stock to a taxable brokerage account, pay ordinary income tax only on the stock’s original cost basis, and defer tax on the appreciation until you sell. When you do sell, the gain is taxed at long-term capital gains rates instead of ordinary income rates.
Rolling the same stock into an IRA forfeits this treatment. Every dollar later withdrawn from the IRA is ordinary income, appreciation included. To qualify for NUA treatment, you must take a lump-sum distribution of your entire vested balance from all plans with that employer within a single tax year, following a qualifying event such as separation from service, reaching 59½, disability for the self-employed, or death.
What a Failed Rollover Costs
When a rollover fails, the tax consequences compound. The full distributed amount is included in taxable income for the year you received it. If you’re under 59½ and no exception applies, add the 10% early withdrawal penalty. For a SIMPLE IRA distribution inside the first two years, that penalty is 25%.15U.S. Department of Labor. SIMPLE IRA Plans for Small Businesses
If failed rollover money ends up in an IRA where it doesn’t belong (for example, a deposit that violates the one-per-year rule), the IRS treats it as an excess contribution subject to a 6% excise tax each year until you remove it. Withdrawing the excess and any earnings it generated before your tax filing deadline for that year stops the annual charge.8Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Stack income tax, an early withdrawal penalty, and a recurring excess-contribution excise tax together and you can lose a third or more of the distribution.
Keep the Paperwork
Rollovers generate forms on both ends. The delivering plan or IRA issues Form 1099-R to report the distribution. A properly coded direct rollover from an employer plan will show zero in the taxable-amount box.16Internal Revenue Service. Instructions for Forms 1099-R and 5498 An indirect rollover shows the full amount as potentially taxable, and it’s on you to report the rollover on your tax return so the IRS knows the money landed in another qualified account. The receiving IRA custodian files Form 5498 reporting the rollover contribution.17Internal Revenue Service. Form 5498 – IRA Contribution Information Keep both. If the IRS ever questions whether a distribution was properly rolled over, these are the proof.