Why is a direct rollover a good idea?

Let us start by saying - Because of the potential tax implications of indirect rollovers, Manifest only facilitates direct rollovers.

What is a direct rollover?

A direct rollover is where your money is transferred directly from one qualified retirement account to another (e.g. two 401(k)s or a 401(k) and a 403(b) or a 401(k) to an appropriate IRA). No money is withheld for taxes. In most cases, your retirement account administrator sends the money directly to your new account and you don't have to do a thing. In some cases, your account administrator sends you a check made out to the new provider. Your responsibility is to mail the check to the new account provider. Since the money is never technically in your hands -- you can't cash the check -- the IRS does not treat it as income and no taxes are withheld.

Why is it a good idea to perform a direct transfer on your old 401(k)?
  • Performing a direct transfer on an old 401(k) allows you to move your retirement assets into a current or new account of yours that is more convenient for you and may allow more control of the assets. You gain peace of mind by knowing these assets are in your preferred location!
  • You only come into contact with your account balance for a very short time, if at all. In fact, the check will be made out to your new institution - no one other than your new provider, not even you, can cash it! Hence, there is less risk of theft, fraud, or misplaced money than in an indirect transfer or withdrawal.
  • Direct transfers are done with no penalty and carry no taxable implications (unless you’d like to perform a Roth conversion, see here). There is also no 60-day limit to move your funds.
What is an indirect rollover?
An indirect rollover is where you essentially cash out your old retirement plan and re-invest the funds in a new plan in 60 days or less. In this case, 10 to 20 percent of the money is withheld for taxes. With an indirect rollover, your administrator cashes out your retirement account and sends you a personal check. But the check you receive will not be for the full amount in your retirement account. If you are rolling over from an IRA, 10 percent will be withheld. If you are rolling over from a 401(k) or another qualified employer plan, your administrator will withhold 20 percent. The good news is if you re-invest the funds in a new retirement account within 60 days, you won't owe any taxes or penalties. But the IRS requires that you re-invest the exact amount that was in the old retirement account, including any money that was withheld.
Example: if your 401(k) was worth $10,000, and the administrator sent you a check for $8,000 (the total minus 20 percent), you will need to come up with $2,000 of your own money to re-invest the full $10,000 in a new account. You'll get back the withheld $2,000 in the form of a tax credit.
The frequently asked questions, or FAQs, are intended to be helpful and to get you thinking in a more sophisticated manner about your account transfer and related issues. However, these are not meant for accounting, tax, finance, or legal advice, not intended to be exhaustive, and do not create any relationship or duty on our part to assist your particular situation. We offer no warranties on the accuracy or completeness of the information as there could be developments of any kinds, including, but not limited to, any changes in relevant laws and regulations.