DEFINITION of 'Automatic Rollover'
1. The transfer of qualified retirement plan distributions into an individual retirement account with no action required by the account holder.
2. The reinvestment of a certificate of deposit's interest and principle upon maturity with no action required by the account holder. When a CD matures, the certificate holder may have a short window during which to move the proceeds to another account. If they do nothing, the financial institution automatically reinvests the proceeds into a new CD with the same maturity as the original CD.
BREAKING DOWN 'Automatic Rollover'
1. Internal Revenue Service regulations enacted in 2001 as part of the Economic Growth and Tax Relief Reconciliation Act require plan sponsors of most qualified defined contribution and defined benefit plans, section 457 plans and 403(b) plans with an automatic cash-out provision to automatically place certain mandatory distributions into an IRA. If the plan holder wants something different to happen, they can choose a cash distribution or a rollover to a specific retirement account. The regulations became effective in 2005 and apply to mandatory distributions of more than $1,000 that are eligible for rollover and subject to federal income tax withholding.
2. Automatic rollover, also called "automatic renewal," can simplify the reinvestment process for CD holders. The drawbacks are that the CD holder might prefer to put the money into a different investment, and if they do not act during the short time before the automatic rollover kicks in, there will be a penalty to cash out the new CD early.