It is important for American taxpayers to understand the potential tax implications of partial rollovers between qualifying retirement accounts.

As indicated above, an employee doesn’t have to roll over an entire “eligible rollover distribution.”  However, the part not rolled is ordinary income and 10-year averaging and/or capital gain treatment, where applicable, can’t be used. 

In addition, net unrealized appreciation in employer securities attributable to nondeductible employee contributions is immediately taxable. If the employee is under age 59-1/2, the portion of the distribution not rolled over generally will be subject to the 10% early distribution penalty.