An automatic rollover is when money is transferred between two Individual Retirement Accounts (IRAs) belonging to the same person without that person having to expressly authorize the transfer. This most frequently happens when somebody changes jobs, getting a new IRA. If the amount of money in the old IRA is small enough, the administrator of the new plan will take care of the paperwork in transferring the money. A separate type of automatic rollover affects employees that hold an 401(k).
An IRA is a type of retirement saving plan available to employees. In most circumstances, the employee can elect to have a portion of their salary put into the plan automatically and thus deducted from their taxable income. Usually, the employee cannot take money back out of the plan until he is at least 59 and a half.
It is common for people who take a job with a new employer to open a new IRA. Usually, they will want to transfer the funds from the old account into the new one as the overall growth from investments will normally be greater with one account than if the money is split over two accounts. Automatic rollover terms in an account will mean that the person administering the IRA contributions at the new employer will be able to collect the money from the old account automatically, without the employee needing to be involved in the process. There will often be a limit for the old account total, for example $5,000 United States Dollars (USD); if the balance is below this limit, the automatic rollover will go ahead when the employee changes job.
The other main use of the automatic rollover term relates to 401(k) plans. This is a form of retirement savings account that is also administered by an employer on behalf of an employee. It differs from an IRA because it allows the employer to match some or all of the employee's contributions if the company chooses to do so. As with the employee's contributions, this money is not counted as taxable income for the employee.
Tax laws used to require than when an employee leaves a job and the balance of the 401(k) is below $5,000, he must roll over this money into an IRA within a certain period. If this doesn't happen, the employer would send 20% of the money to the IRS and give the rest to the employee, who then became liable for further taxes and penalties. The current laws mean that the employer must automatically rollover the money into a new IRA if the balance is between $1,000 and $5,000; if the balance is below $1,000 the employer simply hands the cash directly to the employee. Employees planning on leaving a job can either designate an IRA administered by the new employer to receive the transfer, or can open an independent "rollover IRA" that receives a balance each time he leaves a job during his career.