The way an IRA direct rollover protects any funds that you want to transfer is very simple – it will maintain the tax deferred status of your money while it’s rollover from one IRA to another. Of course, there are a few things that you need to know to get this benefit, but at the end of the day, it’s really the only way to go.

For example, if you elect to do otherwise – perhaps you choose an indirect transfer where you receive your funds as a check – you risk causing great confusion for both you and the tax man.  This may open the door to a lot of problems because, in the eyes of the IRS and according to current IRA rollover rules, a direct rollover is very different from any other kind of money transfer.  And when you’re dealing with the IRS, you want your intentions to be as clear as possible.

When your money is being moved from one plan to another without ever coming into your hands, the transaction is typically defined by the IRS as an IRA direct rollover.  Additionally, this kind of transaction may be called a trustee to trustee transfer or trustee to trustee rollover.  If you’re moving your funds to a new IRA, think IRA rollover transfer – not distribution – as this is the best way to protect your money from unnecessary taxes or penalties.

To keep your retirement funds and their tax deferred status intact, you’ll want to avoid any hint of a distribution.  This can occur when the money comes out of your old, established plan and into your hands.  This kind of transaction is considered to be a taxable event by the IRS and should be avoided.  If, for example, you’re cashing out your fund and heading to some tropical island with the money, you’re performing a distribution and can expect to pay taxes.  While it might be nice to receive a big check up front, this type of transaction will not protect you and your money from a tax burden.

Although the indirect IRA rollover is a perfectly legitimate way to do your rollover, it’s not the best way to move your money to a new IRA.  In an indirect IRA rollover, your original retirement fund would be “cashed out” and a check would be issued to you in your name.  Even if you then turn around immediately and deposit the check into a new retirement plan, you’ll still lose money to mandatory withholding requirements, which could eat away up to 20% of your initial account balance.

To perform an IRA direct rollover, talk to the fund manager of your newest IRA and ask him or her to execute a direct rollover specifically.  Be sure to use the exact terms “direct rollover” when you talk to the manager of the new or target IRA.  This will minimize your risk of any taxes, withholding or penalties, and will ensure that your money keeps growing – tax deferred – until you need it later in life to fund your retirement.