What is Rollover?


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“Rollover” is a term that can have different meanings depending on the context in which it’s used. Here are a few contexts in which the term “rollover” is commonly used:

  • Financial Markets:
    • Foreign Exchange (Forex): In the Forex market, a rollover refers to the process of extending the settlement date of an open position by rolling it over to the next standard settlement date. Traders pay or earn interest, known as the “rollover rate” or “swap rate”, depending on the interest rate differential between the two currencies they are trading.
  • Retirement Accounts:
    • When moving funds from one retirement account to another (like from a 401(k) to an IRA), the process is often called a “rollover”. This is typically done to maintain certain tax advantages. For example, if you leave a job, you might “rollover” your 401(k) from that employer to an individual retirement account (IRA).
  • Loans:
    • Some lenders may offer a “rollover” option, which allows borrowers to delay the repayment of a loan. This is common with payday loans, where borrowers can roll over their debt if they can’t pay it off by the due date. However, this often results in additional fees and interest.
  • Website Design:
    • In web design, a “rollover” can refer to an effect where an image or button changes appearance when a mouse hovers over it.
  • Vehicles:
    • A “rollover” can also refer to a type of vehicle accident where the vehicle turns over on its side or roof. This is commonly associated with taller vehicles like SUVs, which have a higher center of gravity.

The precise meaning of “rollover” depends heavily on the context, so it’s crucial to consider the surrounding information when interpreting or using the term.

Example of Rollover

Let’s focus on the context of retirement accounts, as that’s a common usage of the term “rollover.”

Scenario: Rollover of a 401(k) to an IRA

Background: Jane worked at Company A for 10 years and contributed to her 401(k) retirement plan during her tenure. She has accumulated $100,000 in her 401(k). Now, Jane has decided to leave Company A and start a new job at Company B.

Options: Jane has several options regarding her 401(k) from Company A:

  • Leave the money in her former employer’s 401(k) plan, if permitted.
  • Roll over the funds to her new employer’s 401(k) plan, if the new plan allows it and if she chooses to participate.
  • Roll over the funds to an Individual Retirement Account (IRA).
  • Cash out her 401(k). However, this would likely result in taxes and potential early withdrawal penalties.

Decision: After researching and considering her options, Jane decides that rolling over her 401(k) from Company A to an IRA is the best choice for her. This is because she wants more investment options than the 401(k) plans offer, and she doesn’t want to pay the early withdrawal penalties and taxes associated with cashing out her 401(k).

Rollover Process:

  • Jane opens an IRA with a reputable financial institution.
  • She contacts the 401(k) plan administrator of Company A and requests a direct rollover to her new IRA. A “direct rollover” means the funds are transferred directly from her 401(k) to her IRA without her receiving the funds. This avoids any tax withholding.
  • Company A’s 401(k) plan administrator transfers $100,000 to Jane’s IRA.
  • Jane now has the ability to invest her retirement funds in a wider array of investment options within her IRA.

Outcome: With this rollover, Jane effectively moved her retirement savings from her previous employer’s 401(k) plan to an IRA without incurring taxes or penalties. She now has more flexibility in her investment choices and maintains the tax-deferred growth of her savings.

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