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Indirect vs. direct rollovers: What's the difference?

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Want to move money from a former employer's 401(k)? Or consolidate multiple retirement accounts?

There are two primary ways to send money from one qualified retirement account to another: transfers and rollovers. There are also two types of rollovers: direct and indirect. With a transfer or direct rollover, your money is sent directly from one institution to another. With an indirect rollover, the money—temporarily—comes to you.

As you explore transfers and rollovers, you'll discover which options are allowed for which types of transactions. When weighing indirect vs. direct rollovers, you'll learn that each type has benefits that may best suit your needs.

3 ways to move your retirement money

Your options for moving your retirement savings depend on the accounts involved. In most cases for money in an employer-sponsored plan, you have opportunities to use a transfer, a direct rollover or an indirect rollover. With funds in an IRA, you can choose a transfer or an indirect rollover.

1. Transfer

A transfer is the process of moving money from one retirement account to another account of the same type. For example, you can transfer money from your former employer's 401(k) plan to your new employer's 401(k) plan. Or you can transfer your balance from one traditional IRA account to another.

2. Direct rollover

A direct rollover is similar to a transfer but done between two different types of accounts. For example, you can do a direct rollover from a 401(k) plan to a traditional IRA. Your current retirement account's administrator sends your entire balance—electronically or by check—directly to another qualified retirement account that you have opened. It's possible a check will be sent to you, but it should be made out to the new financial institution or brokerage firm "for your benefit," and you should simply send the check on to the destination. Cashing it would incur penalties.

3. Indirect rollover

An indirect rollover also involves moving money between two different types of accounts, but it's more hands-on for you and has certain rules you have to follow. Your current retirement account's administrator issues you a payment for your account balance or the amount you've requested minus a portion to cover taxes you might incur. Within 60 days, you must deposit the amount you received, and you can add additional money to replace the amount held for taxes, in your destination account, although you're not obligated to. However, if you don't replace the amount held for taxes you will have to include those dollars as taxable income and could be subject to a penalty.

    Main differences between direct & indirect rollovers

    When choosing a direct or indirect rollover for an employer-sponsored retirement plan, an IRA or another qualified retirement account, be aware of these key differences:

    Possession of funds

    • Direct rollover: Money is never put in your possession. Your full balance is moved from one account straight to another.
    • Indirect rollover: You receive money from your original account to send to your destination account, so you will possess the money until you deposit it in a new retirement account. This creates an opportunity to use the funds for any purpose during the limited 60-day in-between time. You're just required to deposit an amount equal to the requested rollover before that deadline.

    Potential to incur taxes & penalties

    • Direct rollover: Because you generally won't possess the money, you have no opportunity to take any of it as a distribution and no potential to incur taxes or penalties for doing so.
    • Indirect rollover: Because an indirect rollover puts money in your hands, you have an opportunity to use it for other purposes. If you take a distribution from an employer qualified plan, Employee Retirement Income Security Act (ERISA) regulations require a mandatory 20% tax withholding. You can waive tax withholding on distributions from IRAs. However if you don't waive the withholding, a mandatory 10% must be withheld.

    Need for additional money

    • Direct rollover: Your full original balance is sent to the destination account with no money held back for potential taxes. There's no need to tap additional resources to complete the transaction.
    • Indirect rollover: The payment you receive from your original account could hold back an amount for income taxes, so you can add money from another source to make up the difference. For example: If your 401(k) has a $10,000 balance, and you opt for an indirect rollover to an IRA, you'll receive a check for $10,000 minus 20% income tax withholding. But if you don't deposit the full $10,000 in the IRA, the 20% will be considered a distribution, subject to applicable taxes and penalties. If you deposit the full amount, you'll later receive the withheld amount back as a tax credit for the year the rollover was completed.

    Responsibility for completing tasks on time

    • Direct rollover: Your account administrators are responsible for moving the money. You're not obligated to take any action within a specific timeframe—except in the instance you are the go-between for relaying the check from one institution to another.
    • Indirect rollover: Once you receive the money from your original account, you have 60 days to complete the rollover process. If you don't, any amount of money you didn't place in the destination account is considered a distribution, subject to applicable taxes and penalties. Only in certain situations will the IRS approve a waiver to excuse this time requirement.

    How often you can roll over

    • Direct rollover: Between qualified accounts, there's no limit to the number you can make, annually or otherwise.
    • Indirect rollover: You only can complete one during any 12-month period.

    Direct vs. indirect rollovers: At a glance

    Direct rollover
    Indirect rollover
    How is the money from the original account sent?
    Full balance is sent directly to another account administrator by check or electronic transfer. It also can be mailed to participant's home address payable to the new custodian
    Balance or requested amount minus a percentage held for potential taxes sent to you by check
    Can I cash the check?
    No, check is made out to the new custodian
    Yes, but eventually you'll need to deposit the entire previous account balance (the amount of the check plus the amount held back for potential taxes) in your new account to avoid applicable taxes and penalties
    How does the destination account receive the money?
    Directly from your previous account administrator, except in the rare instance where a check made out "for your benefit" is sent to you, and you deliver it to the new account administrator
    You deposit it
    Is additional money needed?
    No, your entire balance is sent
    Yes, you can add whatever amount was held back to cover potential taxes (and later receive a tax credit for that amount) not required
    Is there a time limit?
    60 days from the time of distribution
    How often can this be done?
    As often as you like, as long as you've met a plan distribution event
    Once per 12-month period

    Choosing the best solution for you

    For most people, moving money from one retirement account to another is best achieved via a transfer or direct rollover. Your entire balance moves. Nothing is held back for taxes, and you don't have to worry about missing a payment deadline. Also, because you can complete transfers and direct rollovers as often as you like, you can use them to consolidate multiple retirement accounts into a single account over a short span of time.

    But some situations may call for an indirect rollover. Because you send the money to the destination account yourself, you have greater control over the timing of the transaction. You also have access to the money for up to 60 days without penalty. You may have circumstances in which you choose to use it to cover immediate expenses while knowing you'll recoup the money in time to send it to your destination account without incurring taxes or fees.

    You don't have to weigh all the pros and cons alone. A Thrivent financial advisor can offer more details about your options along with insights about other aspects of your retirement plans.

    Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

    There may be benefits to leaving your account in your employer plan, if allowed. You will continue to benefit from tax deferral, there may be investment options unique to your plan, fees and expenses may be lower, plan assets have unlimited protection from creditors under Federal law, there is a possibility for loans, and distributions are penalty free if you terminate service at age 55+. Consult your tax professional prior to requesting a rollover from your employer plan.