Financial Dictionary -> Investing -> Rollover

The term "rollover" in a financial context means to reinvest funds from a security that has reached its maturity term into a new issue of a similar security or to transfer funds from one retirement plan into another without paying taxes. Rollover is usually applicable to short-term investments, such as Treasury bills, commercial paper, and certificates of deposit. For instance, individuals may take stock dividends and purchase more shares of the same stock, or they may opt for coupon payments in order to buy more of that bond issue. A process of reinvesting comes into play.

The best way to avoid tax consequences in the process is by "rolling" funds from a conventional retirement account into what is known as an Individual Retirement Account (IRA). There are certain procedures one must follow.

In most cases, you will be charged 20 percent in taxes. If you want to avoid this payment, you must set up a direct rollover, meaning that the check from your company is made out to the custodian or trustee of the IRA where you want to get your funds. Then, you must inform the retirement plan administrator at your old company that you are arranging a direct rollover. After this step, you fill out a form. Within 60 days of receiving the check, you must deposit these funds in the IRA.

With rollover IRA, individuals have greater flexibility. If they wish to utilize a loan provision, they might roll back proceeds into the 401k plan. For tax purposes, however, it is not wise to make annual contributions to this type of IRA. If these are important for you, you might think of opening a new contributory IRA. With regard to the rollover one, you have two management options: a brokerage firm or an independent investment advisor.

In some cases, an IRA is not the best option. If you quit your job and have employer stock in your company retirement plan account, you would do well to withdraw the shares and put them in a taxable account instead of transferring them into an IRA. You will be taxed only on the sum paid for the shares if they are acquired as a lump sum. You can roll over all the other funds into the Individual Retirement Account.

In another context, "rollover" is a fee paid by investors on the foreign exchange market (Forex) who move their positions forward to the next delivery date. This charge comes from the difference in the interest rates during a transaction with two currencies. In some cases, investors can acquire a credit if they are buying the currency with the higher rate. After that, they must sustain given margin positions with their investment brokers in order to earn money from rollover.

Finally, the term "rollover" is also used in the context of equity funds. At the moment, selling businesses to private equity funds is a highly profitable enterprise. Such transactions mainly entail selling middle-market privately-owned companies, which was an exception to the rule in the past. Rollover comes from the concept of the management receiving equity in the buying company in exchange for a part of the equity they own in the target company. In this way, the equity of the management is "rolled over" to the buying company.