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Direct Rollover: What It Is and How It Works

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Updated July 29, 2024

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What Is a Direct Rollover?

A direct rollover is a qualified distribution of eligible assets from a qualified plan, a 澳洲幸运5官方开奖结果体彩网:403(b) plan, or a governmental 457 plan into a traditional individual retirement account 📖(IRA), a qualified plan, a 403(b) plan, or a governmental 457 plan.

A direct rollover can also be a distribution from an IRA to a qualified plan, 澳洲幸运5官方开奖结果体彩网:403(b) plan, or a governmental 457 plan. A direct rollover effectively alꦐlows you to transfer funds from one retirement account to another without penalty and without creating a taxable event.

Key Takeaways

A direct rollover allows you to transfer funds from one qualified account (such as a 401(k) plan) directly into another (such as an IRA).
The original fund custodian will draft a check or wire transfer made out to the new account custodian, and not to you.
The purpose of a rollover is to maintain the tax-deferred status of those assets without creating a taxable event or incurring penalties.
To avoid penalties and taxes, the rollover must be effected within 60 days of withdrawing funds from the original account.

How Direct Rollovers Work

A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or a portion of this to another eligible plan. The rollover transaction isn't taxable unless the rollover is from a traditional account to a Roth IRA. The IRSꦯ requires that account owners report tꦆhe rollover on their federal tax return.

To conduct a direct rollover, you need to ask your plan administrator to draft a check and send it directly to the new plan. In IRA-to-IRA transfers, the trustee from one plan sends the rollover amount to the trustee from the other plan. If you receive a check from your existing retirement account, you can cash it and deposit the funds into the new plan.

Warning

You must complete th꧑e process within 60 days to avoid a p🤪enalty and income taxes on the withdrawal.

If you miss the 60-day deadline, the Internal Revenue Service (IRS) treats the amount like an 澳洲幸运5官方开奖结果体彩网:early distribution, which is subject to a 10% penalty.

How They're Made Payable

Direct rollover assets are made payable to the qualified plan or IRA custodian or trustee and not to the individual. The distribution may be issued as a check made payable to the new account. For example, if an individual decides to switch employers and move their retirement assets built up over time in their first employer’s retirement plan, they must coordinate with the plan administrator, often an 澳洲幸运5官方开奖结果体彩网:asset management firm like Fidelity or Vanguard, to close the account and write a check for the account balance to theꦛ new IRA custodian.

Some firms charge fees for this service, though they are usually not substantial. On the other end, firms often charge small fees to open new accounts. If an employee is beginning a new job, often this new employer will assume the cost of setting up the new retirement account. Sometimes, the employee will have to wait several years in a vesting period before they ꦫmay be eligible to open a new retirement account and have their em😼ployer begin making contributions.

What Are Qualified Retirement Plans?

Qualified retirement plans meet certain criteria, such as 澳洲幸运5官方开奖结果体彩网:non-discrimination among employees, to be eligible for certain tax benefits. These include an employer taking a 澳洲幸运5官方开奖结果体彩网:tax deduction for contributions they makওe to the plan and employees taking 𝓀a tax deduction on their own contributions.

What Are the Major Types of Qualified Plans?

The two major types of qualified plans are 澳洲幸运5官方开奖结果体彩网:defined benefit plans and 澳洲幸运5官方开奖结果体彩网:defined contribution plans. A defined benefit plan is a traditional pension plan in which benefits are based on a specific formula, often including the number of years of employee service times a salary factor. Defined contribution plans allocate money to the account based on a percentage of each employee's earnings. Companies may also contribute to the plan via a 澳洲幸运5官方开奖结果体彩网:matching contribution or 澳洲幸运5官方开奖结果体彩网:nonelective contribution.

How Are You Taxed on a Roth IRA?

With a Roth IRA, you are taxed the year you contribute to the account. The funds (both contributions and earnings) grow tax-free until you withdraw them, typically in retirement. As long as you are 59 ½ or older and have had the account for at least five years, your withdrawal will be tax and penalty-free. If you're younger than 59 ½ and you've had the account for at least five years, you can withdraw the contributions tax and penalty-free. Withdrawing any earnings before age 59 ½ will incur a 10% penalty.

A traditional IRA is taxed differently. In the year you contribute to a traditional IRA, you receive a tax benefit: you can reduce your taxable income by the amount you contributed to the plan. (You cannot do this with a Roth IRA.) When you withdraw the funds, however, you'll need to pay taxes on them at your current 澳洲幸运5官方开奖结果体彩网:income tax rate. With🐻drawing any funds (contributions or earnings) bef﷽ore age 59 ½ will incur a 10% penalty.

The Bottom Line

Direct rollovers are a qualified transfer of assets between 澳洲幸运5官方开奖结果体彩网:qualified retirement plans, a 403(b) plan, or a governmental 457 plan. Your plan administrator will transfer the funds directly into your new plan, or issue you a check made payable to your new plan. The key thing to remember is the 60-day deadline: you have 60 days to complete the rollover, or you w🦄ill be hit with a 10% early withdrawal penalty and taxes by the IRS.

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