When you take a distribution of assets from a qualified plan and move them to another qualified plan, that is a direct rollover. For the rollover to be direct the assets are paid directly to the new qualified plan or IRA Custodian, not to the individual.
An investor may opt to use a direct rollover scenario if they are moving from one company to another in order to avoid leaving behind the funds. Furthermore, if the new employer has a better retirement plan, there is the possibility of earning more in the new location. As people change jobs more frequently there is the very real possibility of accidentally leaving a retirement plan behind.
When you choose to make a direct rollover, the change is reported, but there is no tax due on the funds. Since the money never went through your hands, it is not counted as income. It is important to understand that step because if you make the choice to have the payout check written in your name, rather than the name of the new fund, you will have to pay taxes on the assets.
The IRS requirement for reporting direct rollovers ensures that the transfer actually takes place. They can clearly see that the individual didn’t receive any income as a result of the transfer. Since that income can actually drive you into a higher tax bracket it is well worth your while to make sure that all the paperwork is completed properly before you make your transfer.