Essentially, there are three methods of moving retirement money from an IRA to an IRA or from a workplace retirement plan like a 401(k) to an IRA. Two of them are similar, direct transfers and rollovers, and the third, 60-day rollovers,  open all kinds of potential problems. To produce the desired outcome, properly transferring retirement funds is imperative.

Direct Transfers.

A direct transfer is recommended when moving money from one IRA to another. With a direct transfer, (also called a “trustee-to-trustee” transfer), the funds go directly from one IRA custodian to another. Note that if a check is made payable to the new custodian “for the benefit of” (FBO) the account owner but received by the IRA owner, that will still qualify as a direct transfer.

Example: John has an IRA with Custodian X. He wants to consolidate his accounts with Custodian Z. John requests a direct transfer of his IRA from Custodian X to Custodian Z. John asks for the transfer check be mailed to him, because he is a bit of a control freak . Custodian X issues a check payable to “Custodian Z FBO John, IRA.”  John hand-delivers the check to Custodian Z. This method qualifies as a direct transfer.

Direct transfers are not reportable to the IRS. As such, no 1099-R is created for the transaction. Additionally, if an IRA owner is subject to required minimum distributions (RMDs), the entire account, including the RMD, can be directly transferred. There is no need to take an RMD before a direct transfer (although the standard deadline still applies).

Direct Rollovers.

When retirement dollars move from a work plan like a 401(k) to an IRA, the best option is the direct rollover. (A “direct transfer” is not available with a plan-to-IRA transaction.) A direct rollover is similar to a direct transfer with a couple of differences. Primarily a direct rollover is reportable to the IRS and will generate a 1099-R showing the distribution. When the direct rollover is received, the IRA custodian will produce a 5498, confirming the rollover and eliminating any possible taxes due. In addition, if the plan participant is subject to RMDs, distribution of the RMD must occur before the remaining funds roll over directly.

Direct rollovers also avoid mandatory 20% withholding if the payments went directly to a plan participant. Note that there is no mandatory withholding on IRA-to-IRA transactions.

60-Day Rollovers.

When an IRA owner or plan participant takes a distribution paid directly to him, he has 60 days to redeposit all or part of those dollars into the same or similar account. Funds can move from plan-to-IRA and IRA-to-IRA via a 60-day rollover. However, this type of transaction opens numerous opportunities for error. If the funds don’t roll over on time, they will be taxable and subject to a potential penalty. Such distributions from a plan require 20% withholding, and any RMDs included in the distribution cannot be re-deposited. Also, a person is only permitted one IRA-to-IRA 60-day rollover per 365-day period. (Note that non-spouse beneficiaries cannot do a 60-day rollover with inherited accounts. Inherited IRAs, and work plan assets, must be moved by either direct transfer or direct rollover.

Be sure to understand these methods before requesting any retirement account transaction.



By Andy Ives, CFP®, AIF®
IRA Analyst

Copyright © 2022, Ed Slott and Company, LLC Reprinted from The Slott Report, 2022, with permission. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
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