What is a Rollover IRA?
It is when you move retirement funds in an employer-sponsored plan—such as a 401(k) and deposit into an IRA. There are two types of rollovers, Direct Rollovers and Indirect Rollovers.
Direct Rollovers
A Direct Rollover is when the retirement funds in an employer-sponsored plan—such as a 401(k), are moved directly from one institution to another, and then deposited directly into an IRA. This is the most productive method of moving an old 401(k) to a self-directed IRA because you, never take direct possession of the funds, and therefore the mandatory 20% withholding for taxes is not applied.
The rollover transaction is usually initiated by you—the plan participant—and requires only two steps: One, open an account and complete a Rollover Certification Form. Two, complete the forms required by your employer to move the funds out of your 401(k).
Indirect Rollover
An indirect rollover—also referred to as a 60-day rollover—is when you take possession of your retirement funds and/or assets before depositing them back into a retirement account, and do so within 60 days. For example, if you request your funds from your old 401 k—but have not yet established an IRA in which to deposit those funds, in most cases your employer will give you a distribution check in your name. You’ll then have 60 days from the day the distribution check was issued to deposit those funds in a retirement account. If you fail to complete the transaction in the 60-day window, you will be taxed and penalized if you are under age 59.
