In short, an IRA direct rollover is the movement of money from a retirement plan, like a 401k or profit sharing plan, to a Rollover IRA account. This is not the same as a distribution, where the account holder receives the account balance directly as cash. If that happens, the account holder may be subject to taxes, penalties and withholding on direct rollover.

IRA Rollover Contribution Limits

There is customarily no limit on the amount of money that can be rolled over into a Rollover IRA.  By keeping these funds separate from a regular IRA account, they are maintained apart from any regular annual contributions that you as an individual may contribute to your IRA.

All of this is important because if the contributions from an employer are mingled with personal contributions, that money cannot be rolled into another employer’s plan.  It is also important to note that money going from one type of IRA to another does not need to be reported to the IRS as taxable and is not considered a distribution.  If the account holder receives assets – meaning a portion of your money is paid to you – then the whole situation changes and the account holder is likely to have some level of tax liability.

Why Choose an IRA Direct Rollover?

The key here is that the money goes from the manager of one account to the manager of another – meaning that it’s a fund to fund transfer.  Regardless of the intention, if the money comes out of the fund to the account holder, it becomes a distribution.  To avoid any possible penalties, the exchange has to occur between the accounts.

When you fill out your IRA rollover forms, you’ll see an option to either take the account balance as a cash distribution, roll the funds directly into another IRA or move your investments to a new employer’s plan.  If you elect to take the cash distribution, you can expect to be charged an early withdrawal penalty (unless you’re over age 59 ½) and the funds you take out will be treated as regular income on your annual tax return.

How Does an IRA Direct Rollover Occur?

In most cases, an IRA rollover will occur when an employee changes jobs (assuming the rules of the fund entitle the account holder to a distribution from the old plan).  By doing an IRA rollover to a traditional IRA, the funds will be transferred tax-free.  This means that, ultimately, the funds can grow on a tax-deferred basis.  In addition, this means that the funds are under the direct control of the employee and all investment decisions and distributions will be decided by the employee.

Setting up an IRA direct rollover is relatively easy – all you need to do is set up a new IRA with the account provider of your choice and then complete some simple paperwork provided by the company.  The IRA rollover transfer will mostly take place between the two account providers, and may include sending a fund wire transfer or mailing a check to the receiving plan, the trustee or the custodian of that plan.