Can I Have a Direct & Indirect Rollover in the Same Year?

by Ciaran John

A rollover occurs when you transfer money between two tax-deferred retirement accounts. You can roll funds using a direct or an indirect transfer and you can conduct both types of transfer within the same year. However, you must ensure that you understand the differences between these two transfer options, otherwise you could end up having to pay tax penalties as a result of your attempted transfers.

Direct

401(k)s and other types of employer-sponsored pension plans are operated by financial firms that act as trustees. This means that you do not have direct access to your money while it remains in the account. When you set up a direct rollover, the account trustee sends your retirement money directly to the trustee of the destination account. Although money physically moves from one financial firm to another, the funds are not exposed to taxation because you do not actually take possession of the money during the transfer. The Internal Revenue Service (IRS) places no limits on direct transfers, so you could in theory conduct direct transfers several times a year.

Indirect

When you conduct an indirect rollover, you cash in your retirement account and receive the account proceeds. You are responsible for reinvesting the money into a new retirement account. The IRS regards indirect rollovers as taxable events because you withdraw money from your retirement account and you may choose not to reinvest the money in a new retirement account. Therefore, the fund custodian must hold back 20 percent of your withdrawal to cover federal income tax. Once you have conducted an indirect rollover, you cannot arrange another indirect rollover with those same funds for at least 12 months.

Penalties

You suffer no adverse tax consequences if you conduct both a direct and an indirect rollover within the same tax year. However, with the indirect rollover, you have just 60 days from the time that you make your withdrawal to reinvest the money in another tax-deferred retirement account. If you do not complete the rollover within 60 days then you have to pay a 10 percent tax penalty unless you are age 59 1/2 or older, you are disabled or you use the cash to cover certain types of expenses such as medical costs. If you attempt to conduct more than one indirect rollover with the same money more than once within a 12 month period, the IRS requires you to recharacterize your second rollover as a withdrawal. This means you have to pay tax and possibly a tax penalty on the money that you receive.

Considerations

Many financial institutions pay tiered rates of interest on products such as annuities and certificates of deposit. You can buy one of these retirement accounts with a mixture of directly and indirectly rolled over funds. However, CDs often have terms of less than 12 months. When the account matures, you should arrange a direct rollover if you want to move the money to another account. If you want to roll the money indirectly when the CD matures, you can only complete a partial rollover with the portion of the funds that you previously moved with a direct rollover.

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