An indirect rollover allows for the transferring of assets from a tax-deferred 401(k) plan to a traditional IRA. With this method, the funds are given to the employee via check to be deposited into their own personal account. With an indirect rollover, it is up to the employee to redeposit the funds into the new IRA within the allotted 60 day period to avoid penalty.
If you have not elected a direct rollover, in the case of a distribution from a retirement plan, or you have not elected out of withholding in the case of a distribution from an IRA, your plan administrator or IRA trustee will withhold taxes from your distribution. If you later roll the distribution over within 60 days, you must use other funds to make up for the amount withheld.
The traditional process of doing an IRA rollover can be somewhat cumbersome and leave account holders with a lot to manage. As a result, most people don’t use a traditional 60-day rollover process to establish a rollover IRA unless they want access to their retirement funds for 60 days as part of 401(k) business funding. Instead, they use direct transfers.
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After you receive the funds from your IRA, you also have a strict 60 days (and not two months) to complete the rollover to another IRA. If you do not complete the rollover within the time allowed—or do not receive a waiver or extension of the 60-day period from the Internal Revenue Service (IRS)—the amount will be treated as ordinary income by the IRS. That means you must include the amount as income on your tax return, and any taxable amounts will be taxed at your current, ordinary income tax rate. Plus, if you were not 59.5 years old when the distribution occurred, you'll face a 10% penalty on the withdrawal. (For more, see: Exceptions to the 60-Day Retirement Account Rollover Rule.)
With more than $5 trillion under management, Vanguard is well-known as a leading provider of professionally-managed, cost-efficient mutual funds and ETFs. Vanguard is the best rollover IRA provider if you want to focus on low-cost, passive investing in your rollover IRA. It offers more than 100 mutual funds to choose from, including several funds that can focus investments in specific sectors or asset classes.
The actual deferral percentage (ADP) of all HCEs as a group cannot exceed 2 percentage points greater than all NHCEs as a group. This is known as the ADP test. When a plan fails the ADP test, it essentially has two options to come into compliance. A return of excess can be given to the HCEs to lower the HCE ADP to a passing level, or it can process a "qualified non-elective contribution" (QNEC) to some or all of the NHCEs in order to raise the NHCE ADP to a passing level. A return of excess requires the plan to send a taxable distribution to the HCEs (or reclassify regular contributions as catch-up contributions subject to the annual catch-up limit for those HCEs over 50) by March 15 of the year following the failed test. A QNEC must be vested immediately.
“A direct transfer going from your 401(k) to your IRA is the best and easiest option. You can get a check and then use the 60-day period to put the money into a qualified account but use caution. Some states require a tax to be withheld. You can only do one rollover per year when doing it this way. Most plans allow a direct transfer at age 59 1/2 even if you are still working, which can allow you to move the bulk of your retirement dollars to an IRA and still contribute to a 401(k).” — Mark Henry, CEO, Alloy Wealth Management
In direct transfers, the IRS withholds no taxes. Rather, the entire amount transfers directly from one account to another. However, if the account holder receives a check he or she deposits into the IRA, the IRS insists upon a withholding penalty. Custodians or trustees must withhold 10 percent on checks from IRA distributions and 20% on distributions from other retirement accounts, whether or not the funds are for a rollover. At tax time, this amount appears as tax paid by the tax filer.
The best way to retire comfortably is to continually purchase a diverse set of income producing assets with low costs over a long period of time. While the specifics of such a strategy can be much more nuanced given your age, experience level, appetite for risk, and other factors, a consistent approach to growing your wealth is buying things that make you money instead of things that cost you money. Until next time…thank you for reading!
Wherever you are in your tax planning process, just know that you’re not alone. The rules around required minimum distributions, Charitable IRA rollovers, qualified charitable distributions (QCDs) and planned gifts sound complicated to a lot of people, but rest assured that you’ve come to the right place to find out what they are, and how they can benefit you. Read on to learn more, and then consult with your tax advisor for advice on your specific tax situation.

Direct rollover – If you’re getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. Contact your plan administrator for instructions. The administrator may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount.
DISCLAIMER: This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. No warranty or representation, express or implied, is made by Phoenix Children’s Hospital Foundation, nor does Phoenix Children’s Hospital Foundation accept any liability with respect to the information provided on our website. You should consult with your professional advisor(s) prior to acting on the information in this guide.
The actual deferral percentage (ADP) of all HCEs as a group cannot exceed 2 percentage points greater than all NHCEs as a group. This is known as the ADP test. When a plan fails the ADP test, it essentially has two options to come into compliance. A return of excess can be given to the HCEs to lower the HCE ADP to a passing level, or it can process a "qualified non-elective contribution" (QNEC) to some or all of the NHCEs in order to raise the NHCE ADP to a passing level. A return of excess requires the plan to send a taxable distribution to the HCEs (or reclassify regular contributions as catch-up contributions subject to the annual catch-up limit for those HCEs over 50) by March 15 of the year following the failed test. A QNEC must be vested immediately.
If you’re no longer employed by the employer maintaining your retirement plan and your plan account is between $1,000 and $5,000, the plan administrator may deposit the money into an IRA in your name if you don’t elect to receive the money or roll it over. If your plan account is $1,000 or less, the plan administrator may pay it to you, less, in most cases, 20% income tax withholding, without your consent. You can still roll over the distribution within 60 days.
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