Why is a direct rollover a good idea?

Direct Rollover

A direct rollover is a simple and tax-efficient way to move your retirement savings to a new account. Here's the key idea: Your money goes directly from your old retirement account to your new one. You never touch it!

Here's how it usually works

  • Initiate the rollover: You tell your old plan provider where to send the money.
  • Direct transfer: They send the funds electronically or issue a check made out to your new account provider.
  • No taxes withheld: Because you don't personally handle the funds, the IRS doesn't consider it a taxable event.
Examples of Direct Rollovers
  • 401(k) to a new 401(k) (e.g., when changing jobs)
  • 401(k) to a 403(b) (another type of employer-sponsored plan)
  • 401(k) to a Traditional or Roth IRA
Key takeaway: Direct rollovers are the preferred method for moving retirement funds because they are straightforward, avoid tax complications, and keep your money growing for the future.

Why a Direct Rollover is the Best Way to Move Your Old 401(k)

Thinking about what to do with your old 401(k)? A direct rollover is often the smartest choice. Here's why:
  • More Control and Convenience:
    • Move your money to an account that you prefer, and that better fits your needs.
    • This could be a new employer's 401(k) or an IRA that gives you more investment options.
  • Greater Security:
    • Since the money goes directly from one institution to another, there's less risk of it getting lost or stolen.  
    • You don't have to worry about handling a large check yourself.
  • Tax Advantages:
    • Avoids any immediate taxes or penalties.
    • Your money continues to grow tax-deferred, helping you build a larger nest egg for retirement.  
  • No Deadline:
    • Unlike other rollover options, there's no 60-day time limit for completing a direct rollover.
In short, a direct rollover is the safest, most efficient, and most tax-friendly way to move your old 401(k).

Indirect Rollover

An indirect rollover is another way to move your retirement money, but it involves a few more steps and potential challenges. Here's the basic idea:
  • You receive the funds: Your old retirement plan sends you a check.
  • Tax withholding: They automatically withhold a portion for taxes (10% for IRAs, 20% for 401(k)s).
  • 60-day deadline: You have 60 days to deposit the full amount (including the withheld taxes) into a new retirement account.

When might an indirect rollover be considered?

  • Emergency situations: If you absolutely need access to the funds for a short period.
  • Specific financial strategies: (Consult a financial advisor to see if this applies to you.)
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.