So you’ve decided to perform a 401k direct rollover to an IRA. Good news – not only is this usually a good decision, but the process is fairly easy as well.

First things first – before you can initiate an IRA direct rollover transfer, you have to establish a new account to receive your rollover funds. A 401k account can be rolled over into most types of IRA accounts, including traditional IRAs, SEP IRAs and more. The type of new account that’s best for you is something that you should discuss with your tax adviser or financial adviser. Also, be aware that there are some legislative changes taking effect in 2010 that may make direct rollover to Roth IRA a more attractive option than it has been in the past. Again, talk with your tax or financial adviser about the best type of account to set up.

Once you have your new account structure chosen and the account is open, check with the trustee or manager of that new account and find out if it is ready to receive funds.  Surprisingly enough, not all accounts are ready to receive rollover funds from day one.  Depending on the terms and structure of the new account (typically called the target account), there may be a short delay before you’re able to complete your 401k rollover to an IRA.

If your account is ready to receive a rollover, you’ll need to speak with the new account trustee about initiating an IRA direct rollover.  In a direct rollover, the trustee of your old account will send funds directly to the trustee of your new IRA rollover account for deposit.  Be sure to tell your new account trustee that you want to perform a “direct rollover of your 401k funds” into your new account using these words specifically, as this will minimize your risk of incurring federal taxes and penalties.

According to current IRA rollover rules, the new account trustee will probably have some forms for you to complete.  As far as financial transactions go, the process will be fairly painless, although you should complete the paperwork with care and review the forms before submitting them.  As with all financial transactions, it’s a good idea to keep a copy of the paperwork for your records.  Once the necessary forms are complete, the direct rollover has been initiated and will largely take place without you.  Before you know it, you’ll receive a notice that the rollover is complete.  Read the notice carefully and if anything seems amiss, contact your new account trustee immediately.

You should also expect to receive a Form 1099-R, which is a record of the IRA direct rollover transaction, from the account trustee at tax time.  A copy of this form is also filed with the IRS, as all 401k rollovers are reported to the IRS.  The good news, however, is that while this transaction must be reported to the IRS, it’s unlikely that you’ll be required to pay any income tax on this transaction.  The exception is if you’re performing a Roth IRA rollover, in which case you will be liable for regular income tax on any funds transferred.