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What are the client's options if they want to roll over their assets from their Defined Contribution Plan to an IRA?

Generally speaking, there are two options:

Direct Rollover:  A direct rollover will come directly from a qualified plan. The plan will transfer the assets to an IRA at your institution based upon the account name and number provided to them. The plan will issue a 1099R to the individual that will be needed for tax preparation the following year.  The individual does not take receipt of the assets. Your firm will issue a Form 5498 indicating receipt of the rollover. Provide the forms and account information required for the direct rollover to your client and/or the plan sponsor.

Indirect Rollover:  An indirect rollover results in the disbursement of the funds to the plan participant.  The client has 60 days to redeposit the amount in a qualified plan or IRA.  If the amount is not redeposited, the client will pay ordinary income tax plus a 10% penalty on the proceeds.  The plan from which the indirect rollover is coming generally will withhold 20% for income tax.  If the redeposit does not include this 20%, the withholding may be a deemed taxable distribution as well.

It is important that you make sure your clients understand the potential tax implications of their rollover options.

 

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