If you move your assets from one investment to another, it's called a rollover. For example, if you move money from one individual retirement account (IRA) to another IRA, that transaction is a rollover. A rollover IRA is an individual retirement account you create with tax-deferred assets you move from an employer sponsored retirement plan to a self-directed investment account. If you arrange for a direct rollover (or a transfer), the trustee of your employer's plan transfers the assets to the trustee you select for your IRA. In that case the total value of the account moves from one to the other.

If you handle the rollover yourself, by getting a check from your employer's plan and depositing it in your IRA, your employer must withhold 20% of the total to prepay taxes that will be due if you fail to redeposit the money in a tax-deferred account. That forces you to supply the missing 20% from another source to meet the deposit deadline.

Transfer vs. Rollover:
You can transfer from one IRA to another similar IRA, or if you leave your job you can transfer your 401(k) into an IRA if you wish. A transfer are made directly from one custodian or trustee to another, without money being distributed to you. Transfers can be done as often as desired without limitation, and it is the usual procedure when moving an IRA from one sponsor to another.

With a rollover, on the other hand, the funds are actually distributed to you. IRA funds can be withdrawn tax-free and penalty-free for 60 days, provided the full amount is returned to the account within this time period. The money can be returned to the same account or to a new IRA. In effect, this is like being able to take a short-term, interest-free loan from your IRA. However, you can do this just once in any 12-month period. If you don't replace the money within 60 days, you will owe income tax on the withdrawal and generally a 10% penalty if you are under age 59 1/2.

Most distributions from qualified corporate retirement plans, Keogh plans and 403(b) plans can be rolled over into an IRA without owing income tax on the distribution, as long as the reinvestment is made within 60 days after receipt. A "rollover IRA" is usually kept separate and not combined with a regular IRA. The law permits your “rollover IRA” to be rolled over again at some later date into a new employer’s pension or profit sharing plan. But you are not allowed to do this if you have ever made regular IRA contributions into your "rollover IRA." Also, your company will withhold 20% of distribution made to you from your employer sponsor plan, but you must come up with that 20% and rollover to an IRA or you'll be taxed on that 20% plus early withdrawal penalty might apply. For example, you have $10,000 in your 401(k) and choose to take the distribution instead of a trustee to trustee transfer. You company will withhold $2,000 (which get back when you file your tax return) and give you a check for $8,000. But in order to avoid taxes and possible penalty, you need to deposit $10,000 into your "rollover IRA".

The following chart summarizes the similarities and differences of the Roth and Traditional IRAs

Be sure to consult with your tax professional, as there are usually other factors that could determine which options are more suitable to meet your financial needs.