If you choose to have your employer make a direct rollover of an eligible rollover distribution to an IRA or another qualified plan, your avoid tax on the payment and no tax will be withheld. If you are changing jobs and want an IRA direct rollover plan of the new employer, make sure that the plan accepts rollovers; if it does not, and choose an IRA direct rollover to a traditional IRA.

When you select the IRA direct rollover option, your employer may transfer the funds directly by check or wire to the new plan, or you may given a check payable to the new plan that you deliver.

In choosing a direct rollover to a traditional IRA, the terms of the payee-employer’s plan will determine whether you may divide the distribution among several IRAs or whether you will be restricted to one IRA, For example, you may want to split up your distribution into several traditional IRAs, but the employer may force you to select only one, After the direct rollover is made, you may then diversify your holdings by making tax-free trustee-to-trustee transfer to other traditional IRAs.

You may elect to make a IRA direct rollover of part of your distribution and to receive the balance. The portion paid to you will be subject to 20% withholding and is not eligible for special averaging. The IRS allows plan administrators to bar a partial direct rollover if the rollover amount is less than $500.

An IRA direct rollover will be reported by the payer plan to the IRS and to you on Form 1099-R, although the transfer is not taxable. The direct rollover will be reported in Box I of Form 1099-R, but zero will be entered as the taxable amount in Box 2a. In Box 7, Code G should be entered if the direct rollover was to an IRA and Code H if to another qualified employer plan or to a tax-sheltered annuity.

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.

Typically, in an IRA direct rollover, the transfer occurs between the two financial institutions.  If your employer does need to send you the check for any reason, ask that it be made out directly to the new IRA account, otherwise you could run into potential problems later.  If the check is accidentally made out to you, send it back without cashing it and request that the money either be sent directly to the new account or made out to the account.

In addition, as with anything that deals with taxes, many people get confused over the IRA direct rollover process and how this impacts yearly contribution limits.  While it’s true that there is a cap on the amount that you can put into your IRA each year, this limitation does not apply to funds that are rolled over from other accounts.  This means that you could move as little as a few thousand, up to more than a million without violating the annual contribution limits.

Hopefully, your IRA direct rollover will proceed smoothly and without any problems.  However, if you have any questions or concerns about the process, be sure to contact both IRA companies in order to clear up any confusion or mistakes before they subject you to unnecessary taxes and penalties.

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.

An indirect rollover occurs when you request the managers of your current IRA to send you the funds directly so that you can deposit that money into another retirement account.  The problem with this method is that it changes the tax burden on the money.  You must get that money into a new rollover IRA within a set time – typically 60 days – or the money will be considered a withdrawal and you will be subject to taxes, penalties and withholding.  These fees can be substantial, depending on the amount of the money involved in the IRA rollover.

In most cases, moving your money in a way that changes its tax status from tax deferred to taxable makes little sense.  After all, the reason you opened an IRA in the first place was to get out from under an immediate tax burden, while allowing your money to grow for retirement.  These kinds of accounts were set up to encourage savings and to make it easier for both employers and employees to contribute to them.  An indirect rollover runs the risk of changing this tax status that you were working so hard to maintain.

Fortunately, there is a very easy way to keep the tax deferred status that you want.  Contact the manager of the new (or target) IRA and direct him or her to perform an IRA direct rollover.  Be sure to use those exact terms – IRA direct rollover.  This specific wording will initiate a specific process where the money is sent from one IRA into the new IRA.  You will never receive a check or see the funds deposit into your bank account when you begin this type of transaction.

Although you, as the account holder, won’t ever hold the money, you will retain all the benefits of your investments when you cash out the account.  To begin the process, the manager of the target rollover IRA will contact his or her counterpart at the established IRA and make all the necessary arrangements to move the money between accounts.  The transfer may occur in the form of a wire transfer, a check or whatever instrument is most convenient.  The main thing to remember is that the money does not ever come into your hands.

The IRS considers an IRA direct rollover to be a reportable event, but not a taxable one.  For this reason, an IRA direct rollover is generally the most advantageous way to move your money.  If you choose the indirect method, you’re risking the tax status of your investments, as well as the amount you’ll lose to mandatory withholding.  Basically, you’d better have a very good reason to choose the indirect option.  If your consolidation of retirement funds is an attempt to maximize returns, doing anything other than an IRA direct rollover will defeat the whole purpose behind having an IRA.

There are three ways to get your money out of an IRA – transfer, rollover or withdrawal.  A rollover IRA withdrawal is an end game option, so to speak – this is the option you choose when you’ve reached retirement age and are ready to start reaping the benefits of years of diligent savings and investing.  Unless you’re at retirement age, withdrawals are considered premature and come with penalties and taxes, except in a few situations that the IRS qualifies as exceptions.

Transfers and IRA rollovers, on the other hand, are transactions you may elect during the life of your IRA.  Both transactions allow you to move money from an existing IRA into another.  However, the consequences of these transactions can be very different.

First, let’s address the case of the IRA direct rollover, since it’s almost always the better choice for moving your retirement funds between accounts.  Here’s where that sticky terminology issue arises again – according to IRA rollover rules, direct rollovers can also be called trustee to trustee transfers or trustee to trustee rollovers.  The key here is that your money will move directly from one IRA into another, without you or your bank account ever receiving a check.  In this case, your retirement funds will maintain their tax deferred status, and you’ll avoid any unnecessary withholding or penalties.

The other type of IRA rollover transfer, which is usually a less attractive option, is sometimes called an indirect rollover or a “payout-then-transfer” transaction.  In this case, your existing IRA is closed and you’ll receive a check.  Ideally that check will be made out to the trustee of your new rollover IRA account, and you will deposit it promptly into your new IRA.  If the check is made out to you, if you hold on to it too long, or if  you deposit it into your own personal account, then the transaction is going to look like a premature withdrawal to the IRS and you’ll open yourself up to the penalties and taxes mentioned earlier.

If you’re able to get that money into a new IRA within the IRS deadlines (typically 60 days), you may be able to avoid those penalties and taxes, although your funds will still be subject to minimum withholding requirements.  But really, why choose a needlessly complicated transaction that requires more work on your part and has even the possibility to create a potential tax burden when there is a more direct, simpler choice?  That choice is an IRA direct rollover, and chances are, it’s what your financial adviser will recommend as well.

First things first – before you can initiate an IRA direct rollover transfer, you have to establish a new account to receive your rollover funds. A 401k account can be rolled over into most types of IRA accounts, including traditional IRAs, SEP IRAs and more. The type of new account that’s best for you is something that you should discuss with your tax adviser or financial adviser. Also, be aware that there are some legislative changes taking effect in 2010 that may make direct rollover to Roth IRA a more attractive option than it has been in the past. Again, talk with your tax or financial adviser about the best type of account to set up.

Once you have your new account structure chosen and the account is open, check with the trustee or manager of that new account and find out if it is ready to receive funds.  Surprisingly enough, not all accounts are ready to receive rollover funds from day one.  Depending on the terms and structure of the new account (typically called the target account), there may be a short delay before you’re able to complete your 401k rollover to an IRA.

If your account is ready to receive a rollover, you’ll need to speak with the new account trustee about initiating an IRA direct rollover.  In a direct rollover, the trustee of your old account will send funds directly to the trustee of your new IRA rollover account for deposit.  Be sure to tell your new account trustee that you want to perform a “direct rollover of your 401k funds” into your new account using these words specifically, as this will minimize your risk of incurring federal taxes and penalties.

According to current IRA rollover rules, the new account trustee will probably have some forms for you to complete.  As far as financial transactions go, the process will be fairly painless, although you should complete the paperwork with care and review the forms before submitting them.  As with all financial transactions, it’s a good idea to keep a copy of the paperwork for your records.  Once the necessary forms are complete, the direct rollover has been initiated and will largely take place without you.  Before you know it, you’ll receive a notice that the rollover is complete.  Read the notice carefully and if anything seems amiss, contact your new account trustee immediately.

You should also expect to receive a Form 1099-R, which is a record of the IRA direct rollover transaction, from the account trustee at tax time.  A copy of this form is also filed with the IRS, as all 401k rollovers are reported to the IRS.  The good news, however, is that while this transaction must be reported to the IRS, it’s unlikely that you’ll be required to pay any income tax on this transaction.  The exception is if you’re performing a Roth IRA rollover, in which case you will be liable for regular income tax on any funds transferred.

Fees

Obviously, you want to make sure that your precious retirement savings aren’t gradually eaten away by excessive fees and charges.  Every financial account provider will charge you to manage your rollover IRA, but the extent to which these charges vary is astonishing.

For example, some people prefer to use a broker (rather than a bank) and allow the broker to shop around and find the lowest fees possible for their rollover IRA accounts.  However, you must be aware that your broker will charge you a premium for this convenience.  Instead, check out the many comparison tables available online to find the institution that will charge you the lowest maintenance fees for your IRA direct rollover on your own.

Once you’ve identified a few low cost IRA rollover account providers, you’ll want to read through the actual terms and conditions of each proposed account to familiarize yourself with any other fees or charges you may encounter.

Ease of Banking

Convenience and ease of banking are very important when selecting your new IRA direct rollover account provider.  Does your new account offer online banking, phone banking and in-house service?  Does your bank offer a wide range of investment options, including stocks, bonds, mutual funds, and overseas investments?  Can you set up an automatic deduction so that your contributions occur easily and regularly?  How hard is it to adjust or alter a standing order?  Ideally, the bank you choose will offer excellent online and phone service so that you won’t have to spend hours standing in line at the bank to deposit funds into your rollover IRA.

Reliability and Security

Sometimes the highest rate of return isn’t necessarily the best choice.  In the current economic climate, it’s become more important than ever to find a safe and secure account provider for your IRA direct rollover.  Consider financial institutions that are well established and that have a strong track record of growth and prosperity.  Do your research and consider recommendations from friends and family who have been happy with the performance of their IRA direct rollover providers.

Customer Service

Customer service is an extremely important factor to consider when choosing the account provider to manage your rollover IRA account.  Good customer service will be highly evident when you first approach the bank, broker or credit union and enquire about the features and options available to you.  Look at the brochures and information on the financial institutions website – is it easy to understand, user-friendly and informative?  Consider the reception you receive if you go and visit the actual premises.  Finally, listen to word of mouth and online forum reviews to be sure you’re choosing an institution that will treat you and your money with equal respect.

A rollover IRA is a safe and secure vehicle for investment that is supported by the government as a means of helping people prepare for their retirement. In the current turbulent economic landscape, this investment option is highly attractive. In addition, the rollover IRA offers a wider range of options and choices than the traditional 401k, and also provides significant opportunities to increase your profit margin and enhance your savings.

The rollover IRA also offers very straightforward account keeping. The process involved in managing a rollover IRA is far more streamlined than other forms of retirement investment. For example, the IRA direct rollover enables you to consolidate your money into one efficient account and keep a close track on its performance. Pension plans, such as the employer-controlled 401k, can become very fragmented and confusing if you move through various positions and companies throughout your life. Changing jobs can be the perfect opportunity to consolidate and set up a rollover IRA.

Perhaps the biggest advantage of the IRA direct rollover is that it offers greater access to your funds than your employer’s 401k or 403b plan. There are a range of conditions that exist that will enable you to access your money without penalty, if necessary. For example, if you become ill or disabled, if you purchase your first home, or if you incur higher education expenses, you can withdraw IRA funds without penalty.

Another reason that may make an IRA direct rollover right for you is the increased range of investment choices that this pension plan offers. While your 401k may only offer you a return 3 – 5% each year, based on its limited investment options, an IRA direct rollover account offers a higher range of potential return because of its access to a broader range of investment choices.

If you have an interest in investing and are willing to research and look for opportunities to grow your wealth, the IRA direct rollover may just be the perfect vehicle for you. Rather than being confined by your 401k’s enforced investment options, you can actually shop around and find a rollover IRA that focuses on investments that actually interest you. The IRA rollover can also reduce your risk of losing money in a destabilized market, as it allows you to spread your funds over a wider range of investment vehicles, therefore reducing your exposure to risk while maximizing your profit.

If you’re changing jobs, or if you’re approaching retirement, carefully consider the features and benefits offered by the IRA rollover – it may just be the perfect investment choice for you. The IRA rollover provides flexibility, freedom of choice and tax benefits that can boost your retirement savings and start you on the pathway to financial security.