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If you’ve ever moved a retirement account — like a tax-deferred 401(k) — from one financial institution to another, it’s possible you did it through a direct rollover. In short, a direct rollover involves moving retirement funds directly between two institutions with no third-party involvement.
Generally speaking, a direct rollover is often the easiest, fastest, and simplest way to move your 401(k) or other retirement plans to a new custodian.
A direct rollover involves transferring (or, “rolling over”) retirement savings from one financial institution directly to another. This is in contrast to an “indirect” rollover, in which you’d receive a check from your old provider (made out to you), and then you’d be responsible for depositing the entire pre-tax amount to your new account.
To complete a direct rollover, you’ll first need to contact your previous employer’s 401(k) plan administrator. Put simply, this is the company whose logo is on the top of your periodic account statements. You might need to provide some basic identifying information (like your account number) for them to locate your account on their platform. If you don’t know who your previous 401(k) provider is, you can use your social security number to look it up here.
From there, once the administrator has found your retirement assets, you can request a direct rollover of your former employer’s retirement plan to a provider of your choice. The new provider could be an online brokerage platform that you’ve selected on your own, or it could be a new employer’s 401(k) plan (assuming they allow roll-ins).
If you decide to move your 401(k) or other qualified plans to an account of the same tax status (i.e., pre-tax to pre-tax), you won’t have to worry about tax consequences when doing a direct rollover. As an example, if you were to move money from a pre-tax 401(k) to another pre-tax 401(k) or to a traditional IRA (Individual Retirement Account), you wouldn’t have to worry about paying income tax to the IRS on the transfer, but you may still have to report the transaction on your tax return.
If you’re not sure how to proceed, consider working with a tax professional or financial advisor to narrow down your options.
Very commonly, a direct rollover happens after you leave a job. Say you had contributed to a pre-tax 401(k) for several years at your old employer, but then decided to leave for a new job. Also, assume that you’ve made the decision that an IRA rollover makes sense for your investing goals.
First, you’d open a traditional IRA at a brokerage of your choice (again, a traditional IRA and not a Roth IRA, to keep things simple from a tax perspective). Then, you’d contact your former employer’s 401(k) plan administrator and request a tax-free, direct rollover of your old 401(k) funds to your new IRA.
From there, the transfer would take place fairly seamlessly and the money would appear in your new IRA account – typically within several weeks at the latest.
The pros of a direct rollover include:
The cons of a direct rollover are:
A direct rollover, as the name implies, involves the direct transfer of money from one financial institution to another. There are only two parties involved: your former employer’s plan administrator, and the account provider you’ve chosen for the destination account.
An indirect rollover, on the other hand, is a different animal entirely. With an indirect rollover, you’ll receive a check in the mail, made out to you as an individual, and with taxes withheld from your original plan balance.
At that point, you’ll be responsible for depositing the entire pre-tax 401(k) balance to your new account within 60 days to avoid both taxes and early withdrawal penalties (also known as a 60-day rollover).
Indirect rollovers are unfortunately ripe with opportunities for error, which is why they’re better off avoided unless absolutely necessary. For a comprehensive guide on how to roll over your 401(k), you can follow the directions laid out here.
As is evident, direct rollovers are substantially easier to complete and are generally recommended for those interested in moving their employer-sponsored plan from one financial institution to another.
The two words are often used interchangeably in these processes, though there is a subtle difference between the terms. A transfer takes place between accounts of the same type (i.e., IRA to IRA), while the term “rollover” is meant to describe money moving from one account type to another (i.e., a 401(k) rollover to an existing IRA).
There is no restriction on how often you can do direct rollovers. There is, however, a limit on how frequently you can transfer money indirectly from one IRA to another (generally, one per year).
Direct rollovers do not come with deadlines in the same way that indirect ones do. If you elect the direct rollover option, you’ll likely see funds transfer over to your new plan within a few weeks.
If you have both account types, this might make a direct rollover even easier. You can simply roll your old 401(k) into your existing traditional IRA.
Converting money to a Roth IRA and performing a direct rollover is best thought of as separate topic areas. While it’s possible to roll a 401(k) directly to a Roth IRA, it’s not usually considered the optimal choice.
Generally, it’s sensible to roll pre-tax 401(k) money to a traditional IRA before considering a conversion to Roth IRA. Conversions to Roth will be taxable under the Internal Revenue Code, which is why a direct rollover from a 401(k) plan to a Roth IRA is generally not recommended.
This is not an issue when it comes to directly rolling over your old 401(k) plans. You can roll over multiple 401(k)s to the same IRA with no tax consequence, assuming all of your accounts have the same tax status. You can also have multiple retirement accounts or different IRA custodians.
The best way to find out if direct rollovers are possible for your old retirement account is to call your (former) employer’s plan administrator and ask. Since this is a common question, it’s more than likely the plan administrator will have an answer for you right away.
