A direct rollover is the movement of assets between two "like" retirement plan accounts or to an IRA. The direct rollover was designed to assist participants in rolling over assets from one retirement plan to another without having to pay the penalty or withholding taxes levied by the IRS.
Like an IRA, individuals who wish to open an IRRA should follow IRA eligibility guidelines. Clients should understand the intent of an IRRA is to hold funds from a prior retirement plan and eventually return the funds to a qualified plan.
Assets for the initial deposit into IRRAs must come from pre-existing retirement accounts, including conduit IRAs and employer-sponsored plans. Clients typically open IRRAs to "store" their money while deciding where to invest it permanently.
Example: Jane V. Doe was employed by XYZ and participated in the company sponsored retirement plan. Jane and her family decide to relocate and Jane must leave her job. She cannot leave her account with XYZ because she is no longer an employee. Jane decides that until she can find a new employer, she wants to protect her retirement assets and avoid paying taxes on those funds. She instructs XYZ to move her assets into an IRRA. Jane can keep her money in the IRRA indefinitely while she looks for another employer.
Once an IRRA is established, the client can make contributions to it, however, contributions will destroy the conduit nature of the IRRA and the client will lose the ability to roll the IRRA into an employer-sponsored plan. These clients may also rollover or transfer from other "like" retirement plans. IRRAs are typically opened with assets from qualified plans and any future deposits must also be of like qualified plan money.
The distribution guidelines for an IRRA are the same as for an IRA. Clients cannot take a distribution from the IRRA before age 59 ½ without paying a 10% penalty tax unless due to one of the following exceptions: death, disability, qualified higher education expenses, qualified acquisition cost of a first home, or annuitizing the account. IRRA accountholders can, however, transfer or rollover the entire account into another "like" qualified retirement account at any time.
Mandatory distributions are the same for an IRRA as for an IRA. At age 70 ½, if the client still maintains an IRRA, he or she must begin to take regular mandatory distributions or pay penalty taxes.
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