Rollover Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Rollover, written in plain English, along with examples of how it is used.
What is Rollover?
Transferring funds from one investment to another without sustaining tax penalties. For example: a 401(k) fund can be rolled over into an IRA account without penalty. Additionally, funds from the sale of a home can be rolled over toward the purchase of a new home without being subjected to capital gains tax.
History and Meaning of Rollover
The term Rollover has been used in finance and taxation for many years. In simple terms, it refers to transferring funds from one investment account or asset to another without incurring tax penalties. The term has its roots in the early days of retirement savings plans, such as 401(k) plans, which allowed employees to defer taxes on their savings until they retired.
Examples of Rollover
John wants to move his 401(k) account to a new employer's 401(k) plan. He can do this by doing a direct rollover, which means he instructs his current plan administrator to transfer his account balance directly to the new plan administrator.
Jennifer has sold her home and wants to use the proceeds to buy a new house. By doing a rollover of the funds, she can avoid paying capital gains tax on any profit she made from the sale.
Bob has an IRA and wants to move his account to a new brokerage. By doing a rollover, he can transfer his IRA funds to the new account without incurring taxes or penalties.
Legal Terms Similar to Rollover
Transfer: the act of moving funds or assets from one account or entity to another.
Conversion: the act of changing an asset or investment from one type to another, such as converting a traditional IRA to a Roth IRA.
Direct Rollover: a transfer of retirement funds from one plan to another that is initiated and processed by the plan administrator.