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Rollover Roulette: Rollover, Direct Rollover, Direct Payment, Direct Transfer, or Transfer (Part 1: The Terms)

I don’t know about you, but when I hear the terms “rollover,” “direct rollover,” “direct payment,” “direct transfer,” and “transfer” used interchangeably, I get worried. True, these terms are all ways to move money between eligible retirement plans and eligible IRAs free from federal income tax, but they do not mean the same thing.

Using one “rollover” term when you really mean another can result in horrible federal income tax consequences to a plan participant or IRA owner and—at the very least—can add unnecessary ambiguity to a situation. Plan sponsors, plan administrators, human resources personnel, trustees, custodians, investment advisors, and anyone else who deals with retirement plans and IRAs need to be careful with the words used in plan and IRA materials (particularly distribution forms, summary plan descriptions, and IRA disclosure statements) and when these terms come up in conversations with plan participants or IRA owners.

Below is a brief and basic summary of typical “rollover” terms (note that special rules for different types of plans and IRAs such as 457 plans, SIMPLE IRAs, and Roth IRAs are not included):

Term

Permitted Between

Who

Basic Rules

Rollover (also called Indirect Rollover)

Eligible retirement plans to eligible retirement plans, IRAs to IRAs, eligible retirement plans to IRAs, and IRAs to eligible retirement plans

Plan participants, IRA owners, and their surviving spouses after death

Distribution to individual and individual places in eligible retirement plan or IRA within 60 days Limited between IRAs to one rollover between all of an IRA owner’s IRAs in a 12-month period

Direct Rollover

Eligible retirement plans to other eligible retirement plans and to IRAs

Plan participants and their surviving spouses after death

Payment directly to trustee of receiving plan or IRA, not to participant (although participant may deliver check made out to plan or IRA trustee)

Direct Payment

IRAs to eligible retirement plans

IRA owners

Payment directly to plan trustee, not to IRA owner

Direct Transfer

Eligible retirement plans to inherited IRAs

Beneficiaries

Transfer directly to inherited IRA trustee or custodian, not to beneficiary

Transfer

IRA to IRA

IRA owners and their beneficiaries

Transfer directly from IRA trustee or custodian to IRA trustee or custodian, not to IRA owner or beneficiary

Because “rollover” terminology is confusing (some may say without any really good reason!) and the federal income tax consequences can be truly horrible for the individual if the terms are misused, plan and IRA professionals need to be careful when dealing with “rollover” terminology. Although plan and IRA professionals should also be careful not to offer tax advice to plan participants, IRA owners, or their beneficiaries, when “rollover” terminology is used it needs to be used correctly.

In Part 2 of this series, we’ll review some examples of how things can go horribly wrong for plan participants and IRA owners and their beneficiaries if they misuse “rollover” terms to move money between eligible retirement plans and eligible IRAs.

Part 2- Potential Horrible Consequences

Copyright © 2017 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

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About this Author

Vivian S. McCardell, Morgan Lewis, Retirement Benefits Attorney, IRA Lawyer
Of Counsel

Vivian S. McCardell counsels clients on individual retirement accounts and annuities (IRAs) and similar products offered by financial institutions and broker-dealers, as well as qualified and nonqualified retirement plans. She helps clients address issues with nonbank custodians and trustees and other service providers. Additionally, Vivian advises clients on compliance with the US Internal Revenue Code, the US Employee Retirement Income Security Act (ERISA), and other federal and state laws that affect IRAs, and qualified and nonqualified retirement plans.

215.963.5810