IRA rollover vs. trustee-to-trustee transfer

By - Last modified: June 12, 2013 at 3:47 PM

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What is a 60-day rollover? How is it different from a transfer? Which one should I choose?

These are questions you should be asking yourself before you attempt to move your IRA (401k, Simple, SEP) account. Knowing the difference can save you from making a very costly mistake.

We hear the word "rollover" used a lot on TV, in ads and in articles. (I myself have written blog articles about them.) The 60-day rollover is the distribution of funds from a qualifying retirement account payable to the account owner, who then has 60 days to redeposit the funds into another qualifying retirement account.

However, you may not always want to do a rollover. Here’s why.

If the rollover is from a qualified retirement account and paid to you, the custodian forces a 20 percent withholding tax, which must be replaced by you when the money is deposited into the new IRA.

You’ll also need to keep track of when you received your distribution. Most people don't know when the 60-day clock actually begins, and it can be easy to miss the 60-day window.

Also be aware that you will be limited to making one 60-day rollover in a 365-day period (this applies only to 60-day rollovers from IRA to IRA or from Roth IRA to Roth IRA).

The best way to avoid making these mistakes is to avoid 60-day rollovers!

Instead, do a trustee-to-trustee transfer. Transferring your funds directly to another retirement account will avoid any 60-day time problems, and if the rollover is coming from a 401(k) or other qualified plan, it will also avoid the mandatory 20 percent withholding requirement.

To ensure the transfer is successful, have the distribution check made payable to the new IRA custodian (never yourself). There is a special rule that allows a distribution by check to qualify as a direct rollover (and still avoid the 60-day rules) as long as the check is made payable to the new custodian.

For example, your check might read “Custodian X f/b/o (for benefit of) John Doe IRA.”

You’ll still want to check to make sure the funds were deposited into the correct account. A common mistake occurs when funds are accidentally deposited into a non-retirement account. If the mistake is discovered within 60 days, it can be corrected.

Avoiding potential withholding taxes and eliminating the 60-day timeframe are good reasons for using the trustee-to-trustee direct transfer method instead of the 60-day rollover. It takes the ball out of your court and puts the work on the shoulders of your adviser and custodian.

That's what they get paid to do; you might as well make them earn it.

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