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February 10, 2009

Direct rollover

Your Guide

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Definition # 1: A two part transaction, where Part-1 is a distribution and Part 2 is a rollover contribution, where the distribution and rollover occurs directly between the delivering and receiving retirement plans.

Definition # 2: A distribution from a qualified plan, 403(b) or 457(b), to a qualified plan, 403(b) , 457(b) or IRA, where the assets are paid to the receiving qualified plan, 403(b) , 457(b) or IRA for the benefit of (FBO) the participant or IRA owner.
Typically, a qualified plan , 403(b) or 457(b) plan is on the receiving or delivering end of a direct rollover.
Examples of direct rollovers include the following, where the assets are made payable to the receiving plan:
·Distribution from a qualified plan and a rollover contribution to an IRA
·Distribution from a qualified plan and a rollover contribution to a 457(b) plan
·Distribution from a qualified plan and a rollover contribution to a 403(b) plan
·Distribution from a 403(b) plan and a rollover contribution to a qualified plan
·Distribution from a 403(b) plan and a rollover contribution to a 457(b) plan
·Distribution from a 403(b) plan and a rollover contribution to an IRA
·Distribution from a 457(b) plan and a rollover contribution to a qualified plan
·Distribution from a 457(b) plan and a rollover contribution to a 403(b) plan
·Distribution from a 457(b) plan and a rollover contribution to an IRA
Where the receiving account is an IRA, the IRA cannot be a SIMPLE IRA
The delivery of funds from the distributing account may be accomplished by any reasonable means, including, sending a federal fund wire or mailing a check to the receiving retirement plan, trustee or custodian for the benefit of (FBO) the participant. The instrument of payment must be negotiable only by the receiving retirement plan.
Providing the participant, beneficiary or alternate payee (distributee) with a check for delivery to an eligible retirement plan is a reasonable means of accomplishing a direct rollover, as long as the check is made payable as follows:
[Name of the trustee] as trustee of [name of the eligible retirement plan]. For example, if the name of the eligible retirement plan is “Individual Retirement Account of John Q. Smith,” and the name of the trustee is “ABC Bank,” the payee line of a check would read “ABC Bank as trustee of Individual Retirement Account of John Q. Smith.” or “ABC Bank as trustee of IRA of John Q. Smith.”
Notes:
·The term ‘trustee’ is interchangeable with ‘custodian’ in this case.
·Any other variation is acceptable, providing the name of the trustee and the name of the participant is included in the registration.
·If the eligible retirement plan is not an IRA the payee line of the check need not identify the trustee by name. For example, the payee line of a check for the benefit of distributee Jane Doe, where Jane is a participant of a 401(k) plan might read, “Trustee of XYZ Corporation 401(k) Plan FBO Jane Doe.”
Referring Cite
Additional Helpful Information
·A qualified plan must give a distributee the option of having his or her distribution paid in a direct rollover to an eligible retirement plan specified by the distribute
·Only eligible-rollover amounts should be processed as direct rollovers
·Direct rollovers are not subject to withholding tax
·The distribution side of a direct rollover is reported on IRS Form 1099-R. If the receiving plan is an IRA, the rollover contribution ( receiving) side it is reported on IRS Form 5498
·A direct rollover is reported in Box-1 of Form 1099-R, with a 0 (zero) in Box 2a and Code G in box 7.
·The 1099-R and 5498 are issued in the name and social security number (SSN) of the person for whose benefit the funds were rolled over
·A direct rollover may be made for:
the participant ,
the participant’s surviving spouse,
the participant’ spouse or former spouse who is an alternate payee under a qualified domestic relations order (QDRO) or
a nonspouse designated beneficiary, in which case the direct rollover can only be made to an IRA.
·If the distribution is paid to the surviving spouse, the distribution is treated in the same manner as if the spouse were the participant.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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