An Eligible Rollover Distribution [1] is one that is made from an IRA, qualified plan, 403(b) [2] or 457 plan [3] that is eligible to be “rolled over” into another eligible retirement plan [4]. It isn’t unusual for people to roll their retirement accounts over when they switch jobs. If the funds are withdrawn directly and only then put into a new account, they are taxed. Therefore, a rollover distribution is used instead.
Employers must provided documentation to departing employees to explain their options regarding their IRAs. If the individual is required to remove their funds, they have a certain time within which they must do so. It is typical that notice of such requirements be made within no less than 30 days but no more than 90 days before the distribution is to be made. This gives the participant time to open a new account.
Age can also play a role in decisions regarding eligible rollovers. If the participant is younger than 59 ½ they may be subject to an addition 10% penalty if they don’t make plans to have the distribution go directly to another IRA account. This is on top of the taxes they owe for the withdrawal. If the participant is over the age threshold there is no additional tax, but the plan administrator will withhold 20% on the taxable portion of the distribution.
Unless the participant is intending to fully withdraw the funds in the IRA in question it is almost always better to set up a new IRA into which the funds can be distributed. That allows them time to decide how they want to arrange distribution in the future and gives their funds more time to grow.