IRA FAQs: Rollovers
What is a Rollover IRA?
A Rollover IRA is a retirement account that allows you to move money from your former employer-sponsored retirement plan, into an IRA.
Why should you consider a Rollover IRA?
When you move money as a rollover, you preserve the tax-deferred status and avoid early withdrawal penalties. Many people use Rollover IRAs to consolidate former employer-plans and gain access to a wider range of investment options.
What do I need to do to roll over my retirement plan assets to a Fidelity IRA?
A rollover takes three steps:
- Open the appropriate IRA.*
- Move your money to Fidelity—to do this, you will need to initiate a rollover from your former employer’s plan.
- Choose your investments in the Rollover IRA.
Call 800-343-3548 and a rollover specialist will help you every step of the way. They can answer your questions, plus help you initiate the distribution and complete any paperwork that may be required.
*Note that if you have an existing IRA at Fidelity, you can roll your assets into that account (see the next question).
Can I roll over assets into my Traditional IRA?
Yes, you can but it's important to be aware that if you do roll pre-tax 401(k) funds into a traditional IRA, you may not be able to roll those funds back into an employer-sponsored retirement plan. Contact your tax advisor for more information.
Will I owe taxes on my rollover?
Generally, there are no tax implications if you complete a direct rollover and the assets go directly from your employer-sponsored plan into a Rollover or Traditional IRA via a trustee-to-trustee transfer.
However, if you choose to convert some or all of your savings in your employer-sponsored retirement plan directly to a Roth IRA, the conversion would be subject to ordinary income tax. Contact your tax advisor for more information.
If you withdraw the assets from your former employer‑sponsored retirement plan, the check is made payable to you, and taxes are withheld, you may still be able to complete a 60-day rollover. Within 60 days of receiving the distribution check, you must deposit the money into a Rollover IRA to avoid current income taxes.
If taxes were withheld from the distribution, you would have to replace that amount if you want to roll over your entire distribution to your Fidelity IRA. If you hold the assets for more than 60 days, your distribution will be subject to current income taxes and a 10% early withdrawal penalty if you are under age 59½.
Can I move an existing IRA from another institution to Fidelity?
Yes, visit IRA Transfers for a quick overview of the online process.
What should I do if my former employer's 401(k) was recordkept by Fidelity?
If you would like to roll over a former employer's retirement savings plan that is recordkept by Fidelity, please call a rollover specialist at 800-343-3548 for assistance.
Can I roll my money into a Roth IRA?
Most people are eligible to convert their 401(k) to a Roth IRA; however, it is important to be aware of the potential tax implications. If you have money in a designated Roth 401(k), you can roll it directly into a Roth IRA without incurring any tax penalties. However, if the 401(k) funds are pre-tax, then converting to a Roth IRA will be a taxable event. Nevertheless, a conversion has the potential to help minimize future taxes and maximize retirement savings. There are several factors to consider when deciding if converting to a Roth IRA may be right for you. Call Fidelity for more information about converting your savings to a Roth IRA.
I already received a check made payable to me, and 20% was withheld. If I roll over my money now, can I get that 20% back?
You’ll have to replace the 20% that was withheld with your own savings if you want to roll over your entire distribution to your Fidelity IRA—all within 60 days of receiving the distribution. If you do, the 20% that was withheld is credited toward your income tax liability when you file your tax return. However, if you don’t have the cash to make up for the 20% withheld, the IRS will consider that 20% as a distribution, making it subject to taxes and a possible 10% early withdrawal penalty if you are under age 59½.
How do I know if I am eligible for a rollover?
Generally there must be a distributable event. The most common eligibility event is when an individual leaves the service of their employer. Other reasons may include attainment of age 59½, death, or disability. Please contact your plan to determine whether or not you are eligible for a distribution and, therefore, a rollover.
Can I add more money to my IRA later?
Yes, you can add money to your IRA with either annual contributions or you can consolidate other former employer-sponsored retirement plan assets or IRAs. Some people choose to make their annual contributions to their IRA so that they only have to keep track of one account. This may be right for you if you have no desire to roll these assets back to a qualified retirement plan at a future employer. Assets can be commingled and still be eligible to roll into another employer plan in the future; however, it is at the discretion of the receiving plan to determine what type of assets can be rolled over.
Can I leave my former employer-sponsored retirement plan assets in my current plan indefinitely?
No, generally you must begin to take withdrawals, known as required minimum distributions (RMDs), from all your retirement accounts (excluding Roth IRAs) no later than April 1st of the year following the year in which you turn age 72.† If you wait until April 1st, you will then be required to take your second distribution by the end of that year.
Check with your plan administrator to see if there are any other rules that may require the money to be taken out prior to you turning age 72.† For example, many plans require that accounts smaller than $5,000 be cashed out or rolled over. Learn more about RMDs
Can I leave a portion of my 401(k) in an old employer's plan and roll the remaining amount to an IRA?
Plans have different rules and requirements for 401(k) assets. Some 401(k) plans offer equal flexibility to both current and former employees while others place restrictions on withdrawal types and frequency. For example, some plans may allow partial withdrawals while others may require that you either leave all the funds in the plan or perform a full rollover or cash payout. Please check the plan's rules for more information.
Can I roll over my existing 401(k) assets into an IRA while I'm still working?
Generally, you cannot roll over funds from your active 401(k), but there are some exceptions. For example, some plans allow for "in service" withdrawals at age 59½. If you are under age 59½, or if your plan does not have that withdrawal provision, you may be able to withdraw (or roll over) specific types of contributions. For example, if in the past you rolled money directly from an old 401(k) into your current plan, you may be able to move that money out of your plan into an IRA.
Can I roll over an old 401(k) that has both pre-tax and after-tax money in it?
You can, but it is important to select the right IRA for your needs. A Traditional (or Rollover) IRA is typically used for pre-tax assets because savings will stay invested on a tax-deferred basis and you won't owe any taxes on the rollover transaction itself. However, if you roll pre-tax assets into a Roth IRA, you will owe taxes on those funds. For after-tax assets, your options are a little more varied. You can roll the funds into a Roth IRA tax-free. You also have the option of taking the funds in cash or rolling them into an IRA along with your pre-tax savings. If you choose the latter option, it is important that you keep track of the after-tax amount so that when you start taking distributions, you'll know which funds have already been taxed. IRS Form 8606 is designed to help you do just this. Before making a decision, please consult with a tax advisor about your specific situation.
If I leave my current employer, can my vested participation in a defined benefit plan be rolled into an IRA?
The answer depends on the rules of your defined benefit plan, and the type of defined benefit plan. Defined benefit plans, often called pension plans, are qualified accounts, meaning that they contain money that has not been taxed as income. Historically, such plans do not allow this type of transfer until you officially retire, whether or not you were an active employee at the time of retirement. However, as the workforce environment and IRS rules have changed over time, many pension plans now afford greater flexibility.
If your defined benefit plan offers the proper type of distribution, you could roll it over to an IRA or to a new employer's plan, if the plan allows. You should check with your current employer to determine if they will accept a rollover of this type. However, before making a decision, consider that a pension can be a great source of guaranteed income in retirement and should not be dismissed unless you have a specific plan for generating enough income without the pension payments.
What is Net Unrealized Appreciation (NUA)?
Net unrealized appreciation is the difference between the price you initially paid for a stock (its cost basis) and its current market value.
When is a Net Unrealized Appreciation (NUA) strategy favorable?
For retirement plan participants who own employer stock that has grown in value from its original cost, it may be beneficial to adopt an NUA strategy for the employer stock. Generally, from a tax perspective, it is more favorable for participants to roll over their retirement plan assets to an IRA or new employer-sponsored plan rather than take a lump-sum distribution. However, for participants who have large amounts of appreciated company stock, it may be more beneficial to take a lump-sum distribution of company stock instead because it allows them to pay taxes now at a lower rate. Consult your tax advisor for more information.
- An individual owns 1,000 shares of company stock with a current fair market value of $200,000.
- An individual paid $40 per share for a cost basis of $40,000.
- An individual's Net Unrealized Appreciation is $160,000 ($200,000 – $40,000).
If an individual adopts an NUA strategy and takes a lump-sum distribution of the employer stock, he will owe income tax on the $40,000. Assuming the participant is over age 59½ and in the third highest federal income tax bracket (28%), his or her federal income tax liability would be $11,200 (28% times $40,000) in the year the stock is distributed in-kind from the plan. If he or she were to immediately liquidate the shares, and assuming there were no further increases or decreases in share value, then federal income taxes owed on the NUA would be $24,000 ($160,000 x 15%). There would be no 10% penalty on this NUA, regardless of the participant's age.
If the individual elected to liquidate the stock in the plan and take a cash distribution, or roll that stock over to a Rollover IRA and then withdraw the entire balance in cash, the entire market value of the stock would be taxed at the federal level at the ordinary income tax rate. In this example, we're assuming a 28% federal ordinary income tax rate on $200,000, for a hefty bill of $56,000. (Keep in mind that those taxes could go higher depending on your federal income tax bracket and any applicable early withdrawal penalties.)
In order to qualify for NUA, you must meet all of the criteria listed below:
- You must distribute your entire vested balance in your plan within one tax year (though you don't have to take all distributions at the same time).
- You must distribute all assets from all qualified plans you hold with the employer, even if only one holds company stock.
- You must take the distribution of company stock as actual shares. You may not convert them to cash before the distribution. Not all companies allow in‑kind distributions, so be sure to check whether it's an option in your plan.
- You must experience one of the following:
- Separation from service from the company whose plan holds the stock (except in the case of self-employed workers)
- Reaching age 59½
- Total disability (for self-employed workers only)
Of course, there are a number of other factors to consider before deciding to use NUA treatment, such as your overall capital gains situation, your estate plan, and charitable giving, before taking any course of action. A tax professional and financial advisor can help you determine whether the NUA rule applies to your individual circumstances, and if so, how best to deploy it.
Note: The current tax rate is used in this example and is subject to change.