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Rollover is a term it’s important to understand. Bankrate explains it.

What is a rollover?

Rollover is the reinvestment of a mature security into a new security, the transfer of funds from one retirement account into another, or the act of moving a foreign currency exchange position to the next delivery date.

Deeper definition

When a bond matures or is called by the issuer, the bondholder receives the money from the bond and may roll it over or repurchase another similar bond. If the interest rate has changed, the new bond will earn the new rate.

When an investor rolls over a retirement account, the funds from the initial account are distributed through a direct rollover or through a 60-day rollover.

In a direct rollover, the first brokerage firm transfers the money directly to the new brokerage firm. In a 60-day rollover, the first brokerage firm returns the money to the investor. The investor has 60 days to reinvest the money to avoid taxes.

Rollover is also the interest paid to or charged against currency traders who have open positions at 5 p.m. Eastern Standard Time on days the market is open. The fee is determined by the difference in interest rates between the two currencies.

Rollover examples

Dave buys a $500 government bond at 3 percent interest. When the bond matures, Dave receives both the principal and interest. He then takes that money and buys a new government bond. Since the interest rate on the bonds has increased to 3.5 percent, the interest Dave will earn on the new bond will be higher.

Chris has $50,000 in a 401(k). He gets a new job with a different employer who uses a different brokerage firm to manage its 401(k) plans. Chris notifies his current brokerage firm that he wants to roll over this money. The brokerage firm liquidates Chris’ account and sends him a check. Chris immediately transfers the money into his new account. Because Chris deposited the money from his old retirement account into his new retirement account within 60 days, he will not incur a tax hit.

Jen has bought $10,000 in Japanese yen. She holds the currency overnight. The Japanese yen’s interest rate is 2 percent and the U.S. dollar’s interest rate is 1 percent. She sells the yen and buys dollars the next day. Because the yen’s interest rate is higher, Jen has earned a profit of 1 percent.

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