The IRA direct rollover system is one that leaves little room for mistakes, as it is a direct plan-to-plan transfer. In this type of direct IRA rollover transfer, the money that has been invested in the IRA is transferred directly from your old employer’s plan to one that you’ve set up yourself or to a plan that’s offered by your new employer. This is something that’s often done if you’re moving jobs and it allows you to consolidate your IRA funds, instead of having several different accounts set up by different employers. By making sure that the funds are never sent directly to you, you avoid any potential taxes or penalties on your rollover.

And while it may not seem like much up to begin with, the difference between the indirect and the direct IRA rollover transfer methods is substantial. For starters, when you rollover an IRA directly, your old account provider won’t be required to hold out the traditional 20% that’s mandated by the government when you perform an indirect transfer to cover any potential taxes that may be incurred if you fail to redeposit your funds within 60 days. With a direct transfer, you also avoid any early withdrawal penalties that may be charged if you fail to complete the rollover. (more…)