Direct Rollover

A direct rollover is a distribution of eligible assets from a qualified plan, 403(b) plan, or a governmental 457 plan to a Traditional IRA, qualified plan, 403(b) plan, or a governmental 457 plan. It can also be a distribution from an IRA to a qualified plan, 403(b) plan or a governmental 457 plan.

A rollover occurs when one withdraws cash or other assets from one eligible retirement plan and contributes all or a portion of this to another eligible plan. The account owner may be subject to a penalty if the transaction is not complete within 60 days. The rollover transaction isn't taxable, unless the rollover is to a Roth IRA, but the IRS requires that account owners report this on their federal tax return.

Direct rollover assets are made payable to the qualified plan or IRA custodian or trustee and not to the individual. The distribution may be issued as a check made payable to the new account. For example, if an individual decides to switch employers and move her retirement assets built up over time in the first employer’s retirement plan, she must coordinate with the plan administrator, often an asset management firm like Fidelity or Vanguard, to close the account and write a check for the account balance to the new IRA custodian.

Some firms charge fees for this service although they are usually not substantial. On the other end, firms often charge small fees to open new accounts. If an employee is beginning a new job, often this new employer will assume the cost of setting up the new retirement account. Sometimes, the employee will have to wait several years or a vesting period before she may be eligible to open a new retirement account and have her employer begin making contributions.

As noted above, direct rollovers apply to qualified retirement plans. These are plans that meet certain criteria, such as non-discrimination among employees, to be eligible for certain tax benefits. These include an employer taking a tax deduction for contributions they make to the plan, employees taking a tax deduction on their own contributions, and earnings on all contributions being tax-deferred until withdrawn.

The two major types of qualified plans are defined benefit plans and defined contribution plans. A defined benefit plan is a more traditional pension plan in which benefits are based on a specific formula, often including the number of years of employee service times a salary factor. Defined contribution plans allocate money to plan participants, based on a percentage of each employee's earnings. The longer the employee participates in the plan, the higher the account balance grows, also based on investment earnings.