Trustee-to-Trustee Transfers

If you move money from one retirement account to another, try to arrange a trustee-to-trustee transfer, also known as a direct rollover. That involves asking your brokerage firm, mutual fund company, bank or former employer’s 401(k) administrator to send a check that’s made out to your new retirement plan custodian. For instance, the check might be payable to “First Fiduciary Trust Company FBO [for benefit of] Jane Smith.” The check may be sent directly to your new retirement account provider or it could be mailed to you, and you then have to forward it.

Instead of a trustee-to-trustee transfer, some folks opt for a check made out to them personally, sometimes known as a 60-day rollover or indirect rollover. Problem is, if you do a 60-day rollover from a former employer’s retirement plan, you will typically receive a check for just 80% of the account balance, with the other 20% dispatched to the IRS. You can reclaim the other 20% on your next tax return—but only if you manage to roll over 100% of the account balance within 60 days. That won’t be an issue if you have wads of cash sitting around.

But for most people, getting the money together will be a struggle. What if they fail? The 20% not rolled over will be considered a retirement account distribution, which means they will likely get hit with both income taxes and a 10% tax penalty. The bottom line: Don’t let your old employer send you a check made out to you personally. Instead, go for the trustee-to-trustee transfer.

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