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What is an indirect rollover?

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As you've saved for retirement over the years, either through your workplace or on your own, you might have accumulated a few different accounts, possibly managed by different companies. It can make sense to consolidate your various 401(k)s, 403(b)s, 457(b)s or IRAs, whether it's because you want to reduce fees, take advantage of one account's better investment options or just have everything in one place.

Rolling over an old account's assets to a new account can be done in two ways: directly or indirectly. While direct is usually preferred, you may need or want to do an indirect rollover. which is where you temporarily take control of your money while it's in between accounts. Here's what you need to know.

What is an indirect rollover?

An indirect rollover is process where the company that manages your account sends you a check for the amount you request (minus taxes) and then you have 60 days to deposit it (plus taxes) into a new account. If the account you are rolling from is an IRA, the tax withholding step is optional. This indirect rollover process is often more manual and less common than a direct rollover, which is where your full balance goes from one company straight to another.

How do indirect rollovers work?

When you request an indirect rollover, you'll receive a check or direct deposit from the company that manages your retirement account. The company will hold back a mandatory 20% for taxes (you would have to request the withholding for IRAs). You have the option to add that amount on your own when you deposit your money in the new retirement account, but this part is not mandatory. If you do add it back in, you'll get a tax credit later to balance it out.

The 60-day rule

In an indirect rollover, you must deposit this full amount into a new retirement account within 60 days from when you receive the distribution to meet the rollover time limit. You are the middleman between a past account and a new one. If you don't complete the transfer to another retirement account on time, it's considered a distribution. This will trigger any taxes and penalties associated with the account the money came from. You may be able to apply for a waiver of the 60-day requirement, but the accepted situations are limited.

Other limitations

With their complicated nature, the IRS limits you to one indirect rollover every 12 months to IRAs. There is no limit for qualified employer plans. An indirect rollover also only can involve taking money from one retirement account and eventually depositing that amount into one other retirement account.

When to use an indirect rollover (& when to avoid it)

If your goal is only to move money from one retirement account to another, a direct rollover is the easier option. With the time constraint for re-depositing funds and the need to add in your own money to cover held-back taxes, it's risky to choose the indirect option unless you need to.

But one advantage to an indirect rollover is that it provides an opportunity to access short-term cash. During the 60-day in-between time, you can access money that would otherwise be locked up in a retirement account to use in any way you need before putting it into a new retirement account by the 60-day time limit.

So if you have a temporary cash-flow issue that will be resolved quickly, you could use the indirect rollover method to get what amounts to a short-term, interest-free loan.

However, this is a risky plan in most cases because you have to make the deposit within 60 days to avoid taxation and penalties. But for savers who are well aware of the requirements and need a temporary infusion of cash before redepositing the money, it can work.

Discuss the best rollover option for you

Using indirect and direct rollovers to consolidate your retirement accounts into your current employer-sponsored plan or an IRA of your choice can be a wise strategy. It reduces the complexity of managing your financial accounts and even may save you money on fees.

Figuring out whether an indirect rollover is the method for this can be tough. Your local Thrivent financial advisor is driven by a desire to help you achieve financial clarity and can guide you in using your money wisely to reach your goals. They can help you figure out the pros and cons of indirect rollovers for your particular situation and help you plan for the best next steps.

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