What is the term for tax-free distribution of cash from one retirement plan to another?

The term for a tax-free distribution of cash from one retirement plan to another is known as a rollover. This process allows individuals to transfer their retirement savings from one qualified plan, such as a 401(k) or an IRA, to another without incurring any immediate tax liabilities. A rollover is important because it preserves the tax-deferred status of the money during the transition, allowing for continued growth until the funds are withdrawn at retirement.

During a rollover, the individual typically has the option to complete the process either through a direct rollover, where the funds are transferred directly from one account to another without the individual taking possession of the cash, or through an indirect rollover, where the individual receives the funds and must deposit them into another qualifying retirement plan within a specified time frame to avoid taxes and penalties. However, the basic definition encompasses any qualifying transfer of funds from one eligible retirement account to another without tax implications, which aligns perfectly with the description of a rollover.

Understanding the rollover process is crucial for anyone looking to manage their retirement accounts effectively, ensuring they maximize their savings while complying with tax regulations.