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What is a Direct Rollover?

When you take a distribution of assets [1] from a qualified plan and move them to another qualified plan, that is a direct rollover [2]. 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 [3], 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 [4]. It is important to understand that step because if you make the choice to have the payout [5] 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 [2] 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.