Direct rollover

Definition

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

IRC § 3405, Treas. Reg. §1.401(a)(31)-1,  IRS instructions for filing Forms 1099-R and 5498 , § 31.3405(c)–1

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.

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