Direct Rollover

Direct rollover definition

A direct rollover is a way for investors to transfer funds from one investment plan to another, usually without paying additional taxes on the transaction. Direct rollover transactions typically take place when an individual’s employment status changes; in many cases, a direct rollover to IRA or other retirement account offers significant advantages for investors over taking a direct payout or making a delayed rollover to a new retirement account or arrangement.

Direct rollover rules

The IRS allows individuals to make a tax-free direct rollover from 401k and 403b plans to traditional IRAs and non-Roth plans, all of which are tax-deferred retirement accounts. Additionally, a direct rollover to Roth IRA plans is also possible; however, these rollovers require the payment of a conversion fee to cover the taxes owing on the contributions to the Roth plan, since regular contributions to Roth IRAs are taxed at the time they are made. A direct rollover from a Roth IRA account can only go into another Roth IRA account. In most cases, the direct rollover must be completed within 60 days to avoid taxes. The IRS does allow for an extension or hardship waiver of the time limitation in certain cases:
  • If a bank or financial institution caused the delay in error
  • Delay due to death, hospitalization, disability, jail time, or error by the postal service
Other factors may also be taken into consideration, including the length of time the individual has held the distribution and whether the funds have been used for other purposes during that period of time. A direct rollover to IRA or Roth plans is limited to once per calendar year.

Direct rollover to IRA plans

Direct rollover rules stipulate what types of accounts may be transferred or converted. A direct rollover to IRA plans is usually acceptable for these types of transfers:
  • Roth IRA to Roth IRA
  • Traditional IRA to Roth IRA with conversion payment
  • 403(b) to Roth IRA with conversion payment
  • 403(b) to traditional IRA
  • 403(b) to 403(b)
  • 401(k) to 401(k)
  • 401(k) to traditional IRA
  • 401(k) to Roth IRA with conversion payment

Other transfers may be allowable as well; typically the easiest and safest way to effect direct rollover transactions is by trustee-to-trustee transfer. This requires little paperwork on the part of the account holder and minimal work, making it a stress-free way to transfer funds via direct rollover to IRA.

Other direct rollover rules

Typically, investors over 70.5 years of age are required to take a portion of the IRA funds as a distribution at the time of a direct rollover; this generally constitutes about 10% of the outstanding balance of the fund. For individuals under 70.5 years, the entire amount can be transferred in a direct rollover to IRA, Roth IRA, or other qualifying individual retirement plans.
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