3.10.5. Rollovers vs. Transfers
Sometimes qualified retirement plan participants may want to rollover or transfer the assets in a current plan to another qualified plan or to an IRA. Rollovers and transfers differ both procedurally and in their tax consequences.
A rollover is when the individual wants to take the retirement plan account funds to a new investment entity. This usually occurs when an employee leaves one job and takes his pension or accumulated account in one lump sum when he leaves. Rollovers are allowed no more than once a year.
The IRS gives account holders 60 days to complete the rollover. For company-managed qualified plans, the company must withhold 20% of the distribution as a withholding tax. This money is given to the IRS as insurance in case the participant does not complete the rollover for any reason. If the participant reinvests the total amount of the funds she took when she left her employer into a new qualified plan, she will get the 20% back when she files her taxes for that year. The trouble is that when she needs to reinvest the distribution, the participant is missing the 20% of her funds that the IRS is holding. She must find this amount from other sources to be able to complete the rollover and avoid paying taxes on it.
The 20% rule does not hold for IRAs, although an individual who manages his own IRA and would like to transfer his funds to another IRA must still complete his rollover within 60 days. A direct transfer occurs when a qualified plan participant requests that funds be transferred from one management company to another. The participant never holds the funds in his possession. There are no limits on how many times a participant can make a dire