When you find yourself transferring jobs or completing an IRA rollover transfer for some other reason, you’ll want to ensure that you understand the difference between a direct and indirect transfer before initiating any kind of funds transfer. Doing your research from the beginning will help you to avoid many of the common mistakes in IRA direct rollover that other investors fall victim to.

The first thing you need to understand is the difference between the two different kinds of transfers.  Put simply, an indirect IRA rollover is one where the money is taken from your existing IRA and issued to you (with the intention that you’ll redeposit it into a qualified retirement account).  An IRA direct rollover, on the other hand, is a transaction in which the money is moved directly from account to account, cutting you out as the middleman.

Most people choose to use a direct IRA rollover transfer because it’s easier to avoid tax penalties with this type of transaction.  When you’re issued an indirect rollover, you have sixty days to deposit the money into a rollover IRA account.  To ensure that you don’t decide to just hang on to your retirement funds, the former account manager is required to withhold 20% of your account balance to cover the taxes you’ll incur if the funds aren’t properly deposited.  These funds will only be released after you can provide proof that the monies have been correctly deposited.  With an IRA direct rollover, you won’t have to worry about any of this, as the financial institutions will handle the entire process for you.

Also, there are considerations that need to be made if you’re changing the IRA’s type during the rollover process, and it may be easier for banks to process these with a direct rollover.  For example, if you’re doing a direct rollover to a Roth IRA account from a traditional IRA, you will have to pay some taxes on the money you move, as traditional IRA contributions occur on a pre-tax basis, whereas Roth contributions are already taxed.  This is something that you may want to take into consideration and discuss with your financial advisor before deciding whether or not to do a Roth IRA rollover.

Another type of account that’s a little different than a traditional IRA is known as a Simplified Employer Pension or SEP IRA, and the although the money going into this account doesn’t need to be taxed like a Roth IRA, there are certain qualifications that you’ll need to meet.  Specifically, you can only complete a SEP IRA rollover if you’re self-employed, the owner of a small business, or an employee of a small business owner.

The best thing to do if you’re looking at doing an IRA rollover transfer is to elect an IRA direct rollover, which will leave the handling of the money and the taxation of the funds in the hands of the professionals.  Work with them to understand all of the different IRA rollover rates and programs so that you can be sure you’re doing the right thing to preserve your retirement funds.