Rollover

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What is a 'Rollover'

A rollover occurs when reinvesting funds from a mature security into a new issue of the same or a similar security; transferring the holdings of one retirement plan to another without suffering tax consequences; or moving a forex position to the following delivery date. The distribution from a retirement plan is reported on IRS Form 1099-R and may be limited to one per annum for each IRA. The forex rollover fee arising from the difference in interest rates between the two currencies underlying a transaction is paid to the broker.

BREAKING DOWN 'Rollover'

Rollovers often occur as a way of making money for a specific purpose, such as immediate income from day trading, or for saving on taxes, as with retirement plans. As shown by the following examples, the benefits of rollovers vary among different types of investments.

Rollovers in Retirement Accounts

With a direct rollover, the retirement plan administrator may pay the plan’s proceeds directly to another plan or to an IRA. The distribution may be issued as a check made payable to the new account. When receiving a distribution from an IRA through a trustee-to-trustee transfer, the institution holding the IRA may distribute the funds from the IRA to the other IRA or to a retirement plan. In the case of a 60-day rollover, funds from a retirement plan or IRA are paid directly to the investor, who deposits some or all of the funds in another retirement plan or IRA within 60 days.

Taxes are typically not paid when performing a direct rollover or trustee-to-trustee transfer. However, distributions from a 60-day rollover, and funds not rolled over, are typically taxable.

Rollovers in Forex Positions

Long-term forex day traders can make money in the market by trading from the positive side of the rollover equation. Traders begin by computing swap points, which is the difference between the forward rate and the spot rate of a specific currency pair as expressed in pips. Traders base their calculations on interest rate parity, which implies that investing in varying currencies should result in hedged returns that are equal, regardless of the currencies’ interest rates. Traders compute the swap points for a certain delivery date by considering the net benefit or cost of lending one currency and borrowing another against it during the time between the spot value date and the forward delivery date. Therefore, the trader makes money when he is on the positive side of the interest rollover payment.

Example of a Rollover

In January 2016, $216 billion in Treasuries matured. An additional $1.1 trillion in Treasuries is set to mature through 2019. Policy makers plan to continue rolling over the proceeds, benefitting bondholders and dealers.

Because the Fed is rolling over the debt, bond investors believe yields will not rise in 2016. If the government had not rolled over the funds into new debt, it would have raised borrowing in the market by approximately the same amount this year, which may have increased Treasury yields.