An IRA direct rollover occurs when the funds from one IRA are sent to another without you, as the account holder, ever taking physical possession of the money. While the money is always yours (regardless of the type of transfer you elect), if you take physical possession of the funds, you run the risk of the tax status of the money changing.  In most cases, you’ll want to maintain the tax deferred status of your retirement funds for as long as you can.

The general rule to always keep in mind is that like can receive like with little trouble.  For example, if you have an SEP IRA and want to move your money into a new SEP IRA rollover account, it should be a fairly simple process of signing a few IRA rollover forms.  In addition, a traditional IRA can be rolled over into almost any other type of IRA, except for a Simple IRA or a Designated Roth IRA.  In general, the rollover with the widest access to target IRAs is the Simple IRA, with one small catch – generally, you must have been participating in a Simple IRA for a minimum of two years before it can receive funds or you can rollover funds from the Simple IRA.

In addition, it’s worth mentioning the special case that exists with IRA direct rollovers from traditional IRAs to Roth IRAs.  Roth IRAs can receive funds from most other types of IRAs, but there will be tax consequences.  Roth IRAs are unlike most traditional IRAs, as they’re funded with post-tax contributions.  When you rollover pre-tax money into a Roth IRA, you’ll be required to pay taxes on the money you are contributing.

In previous years, there were few reasons to pay taxes now and move your money into a Roth IRA.  However, with the legislative changes taking effect in 2010, performing a traditional IRA rollover to Roth IRA is a much more attractive option.  These legislative changes affect not only contribution limits and income limits, but also how any taxes generated in 2010 can be paid.  If you’re interested in rolling your IRA over into a Roth IRA, talk with your tax accountant about the implications for you, both in terms of your tax bill and your investment strategy.

Once you’ve determined which types of accounts can receive your IRA direct rollover, you’ll want to be aware of a common assumption about these transfers that can lead to a mistake.  When you open a new IRA – usually when you start a new job – you may think that it’s immediately ready to receive your direct rollover.  That may or may not be the case.  The first day of employment isn’t always the day your IRA’s eligibility starts.  In some cases, there may be a delay of days, or even weeks or months.  A call to the trustee of the new IRA is the simplest way to find out if the account is ready and able to accept the rollover.

This may seem like a silly mistake, but it’s one that bears further scrutiny.  If you attempt to complete your IRA direct rollover before your account is able to receive funds, the target IRA could reject the rollover entirely, leaving you with a check for your account balance.  This moves your transaction to the realm of indirect rollovers, which could lead to significant taxes, penalties and mandatory withholding fees.