Direct Rollover vs Indirect Rollover

If you have decided to leave your current employer or are at the age of retirement, then you are likely ready to rollover your 401k into an IRA.  Before you rollover, ensure that you are familiar with the 401k rollover rules so that you can avoid any negative tax repercussions.  Here is some information regarding a direct rollover versus an indirect rollover.

Direct Rollover

This is the most logical form of a rollover as you will avoid all tax penalties.  With a direct rollover you give authorization to your employer to write a check payable directly to your new retirement account.  With a direct rollover, also referred to as a trustee to trustee transfer, you avoid all tax withholdings and you receive no penalties.  Your savings will keep on to growing tax deferred.

Indirect Rollover

With an indirect rollover you receive the money directly in the form of a check.  You are then to deposit that cash distribution into a new retirement account within 60 days otherwise you will face penalties. Your employer however is required to withhold 20% of your funds as prepayment for your federal income taxes.  You have full use of the funds for that 60 days but if you choose not to redeposit it into a new retirement account the entire amount will be taxed and may incur penalties. To avoid any taxes or penalties, deposit the full amount, including the 20% into a new account.

Clearly the direct rollover is the best choice, however if you are in need of money and can and will repay the full amount within 60 days you should choose an indirect rollover.  The indirect is a much riskier method because you have to ensure that you can repay it otherwise you will face hefty taxes and have no more retirement fund. Do some research to get 401k rollover info before you take action.