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Trustee-to-Trustee

IF YOU MOVE MONEY from one retirement account to another, try to arrange a trustee-to-trustee transfer, also known as a direct rollover. That involves asking your brokerage firm, mutual fund company, bank or former employer’s 401(k) administrator to send a check that’s made out to your new retirement plan custodian. For instance, the check might be payable to “First Fiduciary Trust Company FBO [for benefit of] Jane Smith.” The check may be sent directly to your new retirement account provider or it could be mailed to you, and you then have to forward it.

Instead of a trustee-to-trustee transfer, some folks opt for a check made out to them personally, sometimes known as a 60-day rollover or indirect rollover. Problem is, if you do a 60-day rollover from a former employer’s retirement plan, you will typically receive a check for just 80% of the account balance, with the other 20% dispatched to the IRS. You can reclaim the other 20% on your next tax return—but only if you manage to roll over 100% of the account balance within 60 days. That won’t be an issue if you have wads of cash sitting around.

But for most people, getting the money together will be a struggle. What if they fail? The 20% not rolled over will be considered a retirement account distribution, which means they will likely get hit with both income taxes and a 10% tax penalty. The bottom line: Don’t let your old employer send you a check made out to you personally. Instead, go for the trustee-to-trustee transfer.

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Humble Reader
Humble Reader
8 months ago

Several years ago I decided to do an “in-service” transfer from my employers 401(k) to the brokerage which held all of my IRA accounts. The reason was to increase my investment options and also to do a Roth conversion on my employer’s portion of the 401(k). My portion was already a Roth. I knew enough to request a trustee-to-trustee transfer. I truly expected that if I requested the transfer on a Monday that by Friday the funds would be at the brokerage. What I was unprepared for was how long the process actually took, and then was absolutely gob smacked when I discovered that that a paper check was printed and snail-mailed from the 401(k) company to my brokerage. In my naivety I had simply assumed that in this day and age that after the 401(k) investments were liquidated that the funds would be electronically transferred between the two companies. A week to start the process, a week to turn my investments into cash, two weeks of no apparent action, a week to print the check, and a week for the post office, resulting in my being un-invested for more than a month while wondering what would happen if the check never arrived. Needless to say I was relieved when the funds appeared in my IRA accounts.

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