When it comes time to move money from one retirement plan to another, you can choose from a couple of ways to go about it without incurring regular income taxes and a 10 percent tax penalty. Any transfer of funds from a qualified retirement account, such as an individual retirement account, or IRA, to another qualified account is often called a rollover.
An IRA rollover refers to a specific type of fund transfer between two qualified retirement plans. As a tax-free distribution of funds from the original retirement plan, it's reinvested in another retirement plan within 60 days. The account owner controls the funds during the interim period.
Unlike a rollover, a direct transfer occurs when funds move from one retirement plan account and another, without the account holder ever taking control of the money. This can occur through an electronic transfer of funds from one account to another or via a check made payable to the new IRA account and deposited directly into it.
An IRA rollover that occurs via check involves a check made payable to the account owner, who then endorses it. The account holder can deposit this check into any account that accepts check deposits, including a personal savings or checking account. Within 60 days, however, the IRA holder must make an equal deposit into another IRA account, with funds from any source. Conversely, an IRA transfer via check requires a check made payable not to the account owner, but to his IRA. The recipient doesn't endorse this check and cannot deposit it into any account other than the specified IRA account.
After making a tax-free rollover, you cannot make another rollover from either the original IRA account or the IRA account into which you rolled over the funds for one year. This one-year period starts the day the distribution is made, not when you make the rollover deposit. For example, if you receive an IRA distribution on March 1 and make the rollover deposit on April 30th, you cannot perform another rollover until after March 1 of the following year. Direct IRA transfers have no waiting period and may be subsequently transferred or rolled over at any time.