What is a direct rollover?

You've worked hard to save for retirement, and now you're thinking about moving your money from one retirement account to another, perhaps to consolidate them. You probably know that such a move can have tax implications if you don't do it right. It's important to understand how to carry out this transfer without unintended consequences.

Through a simple direct rollover process, you can avoid unnecessary taxes and penalties and preserve your retirement savings.

To move some or all of your money from one retirement account to another without tax implications, you can do a rollover—either direct or indirect—or a transfer.

• Direct rollover. It's a straightforward way to move money from one type of retirement account to a different type at a different institution. You ask your current account administrator to send the money directly to the institution that will hold your new retirement account, either by check or electronically.
• Indirect rollover. It's a more complicated way to move money from one type of retirement account to a different type at a different institution. You take the money from your existing retirement account, via a check issued to you, and deposit it into your new retirement account within 60 days.
• Transfer. This process involves moving money from one type of retirement account to another retirement account of the same type. You might do a transfer to move assets from your old employer's 401(k) to your new employer's 401(k), or to consolidate two traditional IRAs into one.

If you want to move money from an employer-sponsored retirement plan such as a 401(k), 403(b) or 457(b) plan, you usually can choose any of these methods. An IRA only can be transferred or indirectly rolled over.

A direct rollover is ideal when you want to move assets from one retirement account to another without taking possession of the money and avoiding the potential for unnecessary taxes and penalties.

People choose direct rollovers for many reasons. Maybe you've had several jobs over your career and want to bring money from various 401(k), 403(b) and 457(b) plans together into an IRA so it's easier to manage and potentially involves fewer fees. It's also good timing to do a direct rollover if you've just changed jobs or been laid off. You may not want to leave money in your former employer's retirement account, where it might be difficult to keep track of over the years. With a direct rollover, you have the option to move it to a different account type, such as an IRA.

If you can do a direct rollover rather than an indirect rollover, it's much easier and less risky since the money won't pass through your hands. With an indirect rollover, or a "60-day rollover," you'll get a check made out to you, and you have 60 days to deposit the full amount in the new account. If you miss the deadline, you may owe early withdrawal penalties. Direct rollovers also don't have the mandatory 20% tax withholding that indirect rollovers have because you're not receiving a distribution.

You can roll over assets from almost any type of retirement plan. The plan your assets come from determines which plans your assets can go into directly. The following chart shows what's allowed for direct rollovers.

The exact steps may vary by financial institution, but the rollover process typically looks like this:

1. Choose your destination account. If you don't already have an account to transfer the money to, you'll first need to open one.
2. Access your source account. Call the financial institution you want to move the money from or log in to your account.
3. Request a trustee-to-trustee transfer. Tell your financial institution which account you're sending money from and which institution you're sending money to.
4. Let them know how to send the money. You can have a check made out to the name of the financial institution you're moving the money to followed by "FBO" (for the benefit of) and your name. This check can be sent directly from one financial institution to the other, or the funds can be wired between institutions.
5. Watch in case the check is sent to you. If the check is sent to you and it's made out correctly to the new financial institution for your benefit, you can send it on to the new institution. It's still a direct rollover. However, if the check is made out to you or in any way other than to the financial institution for your benefit, send it back as soon as possible. There can be tax implications if you deposit or hold onto this check.
6. Let your new trustee know that you've initiated a rollover. They need to know what to do with your money when it gets there.
7. Keep an eye on both accounts. Be sure to confirm that your money ends up where you want it to.
8. Reinvest. If you weren't able to transfer your assets in kind and had to liquidate them first, make sure to reinvest your cash according to your investment plan.
9. Report. At tax time, make sure you report your rollover to the IRS.

If you want to move money from one retirement account to another, you have to follow a specific process. If you don't adhere to the rules, you accidentally could owe income tax and early distribution penalties—or lose the opportunity to continue holding those funds in a tax-advantaged retirement account.

You don't have to navigate your retirement accounts alone. Contact a Thrivent financial advisor for expert guidance on rollovers and coordinating a retirement strategy.