IRS Direct Rollover Requirements of YOUR IRA/401K Funds

Obviously, for individuals who wish to invest in Real Estate using qualified retirement plan (QRPs) funds, certain rules have to be met in administering the plan to comply with all IRS and, if applicable, DOL regulations. But, when funding the new account with other retirement plan funds, recent questions have come up about what is a “Rollover.”

Under IRC section 401(a)(31), any distributee (you) who wishes to directly rollover funds between one custodian to another has the right to do this as long as it is a permissible event. But, in layman’s terms, what is the difference between a Rollover and its second cousin, the Transfer?

Rollever or Transfer?

Well, to keep things simple for now, typically, IRA funds that are being moved from one custodian structure to another custodian structure can be done through a simple Transfer. This Transfer process merely allows the custodians to transfer the eligible funds between each other so that the distributee (you) never receives the funds directly. However, typically with Rollovers, these events occur when non-IRA funds (QRPs – Qualified Retirement Plan – e.g., 401Ks) are funding the new account. In these cases, the custodians will not execute a Transfer and it is up to the distributee to secure the funds for deposit into the new account. In these cases, an individual has 60 days in which to deposit these funds into the newly-established qualified account.

So, what about Rollovers? What am I allowed to do and what do I need to do?

A direct rollover that satisfies the aforementioned IRC code can elect an eligible direct rollover that is paid directly to a newly-established (and eligible) retirement plan for the benefit of the distributee.  Further, the IRS states that a direct rollover may be accomplished by any reasonable means of direct payment to the newly created plan. Reasonable can and does include a wire transfer or the mailing of a check to the eligible retirement plan.

If payment is made by check, the check must be negotiable only by the trustee of the eligible retirement plan.  If payment is made by wire, the wire transfer can ONLY be wired to the trustee of the eligible retirement plan.  For those individuals who utilize the 401K provision and thus can serve as the trustee of their retirement assets, the custodian of the plan or issuer of the contract should be substituted for the trustee for purposes of this transaction.

But, this always generates a question: If a check is being made payable to the newly created eligible retirement plan, to whom should the check be made out?

For example, if John R. Smith was executing a direct rollover from his current custodian to a 401K account housed with a brokerage firm, the check could be made payable to Brokerage Firm Name (e.g., Charles Schwab) fbo the John R. Smith 401K PSP Account #XXXX.  While under this structure (for 401K accounts) the name of the financial institution is not necessarily needed, I would always recommend that the brokerage company’s name be included to show that it was not going to the individual.

Remember, the main thing is that it is important in these direct rollovers that no wire transfer be sent directly to the distributee and no check can be made payable strictly to the individual. 

Finally, many individuals are curious what QRPs can be transferred or rolled over into other QRPs. The following Rollover Chart simply breaks out the permissibility of various classes of QRP(s) into other classes of QRPs. Hopefully, this will assist you in understanding what funds can be transferred or rolled over into other accounts for your purposes and benefit.

Remember, in your goals to invest in non-traditional assets, it is imperative that all IRS regulations be adhered. The funding of your new account through either a Transfer or Direct Rollover is the first step. Hopefully, this brief description of the Rollover process is of benefit to you.

This entry was posted in 401(k)'s & IRA's, IRS on by .

About John Park

John Park is a facilitator for self-directed IRAs and 401Ks and founder of PGI Agency, Inc. which is host to PGI SelfDirected. Prior to that, John maintained his own insurance agency and also worked in intercollegiate athletics (Arizona State University, Big Ten Conference Office). For over 6 years, PGI has established both self-directed IRA and 401K accounts so that individuals can take control of their retirement assets and invest in both Traditional and Non-Traditional (e.g., real estate) assets. John believes that most people should fully explore having FULL control of their retirement funds and be the steward of their own money.

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