(Article from Fall 2006 Profit Zone)

As individual circumstances change, so may your retirement investment strategy. People who are faced with making decisions regarding their retirement accounts may opt to complete a rollover or a transfer of assets. Keep in mind that the two terms have two different meanings, so it is wise to understand the difference and adopt a plan best-suited for your individual situation.

A rollover is a tax-free reinvestment of a distribution from a qualified retirement plan into an Individual Retirement Account (IRA) or other qualified plan within a specific time frame, usually 60 days. These transfers can happen when leaving a job at an employer who offered a retirement plan such as a 401(k). The company can issue a check for the amount minus 20 percent in withheld taxes. To avoid this penalty, the rollover must be done trustee to trustee, meaning that the check is made out to the new trustee or custodian of the rollover IRA. The company will provide the check and the participant must deposit the check into the new account within 60 days.

A rollover will trigger the issuance of an IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to report the distribution and IRS Form 5498, IRA Contribution Information, to report the rollover contribution. Any taxable portion of a distribution as income must be reported on the individual income tax return. However, rolling eligible assets over to a like IRA avoids income tax.

An IRA owner (or surviving spouse beneficiary) has 60 calendar days to deposit an IRA distribution as a rollover to an IRA of the same type. This 60-day period begins the day after receipt of the distribution. Any portion of a distribution not rolled over may be subjected to taxes and penalties.

Another rule to remember in a rollover is that at IRA owner may only complete one rollover distribution per l2-month period per IRA. After taking an IRA distribution and completing a rollover, no other distribution from the distributing IRA or the receiving IRA is eligible for 365 days.

It is generally accepted that a more efficient method for moving assets from one IRA to another is the transfer process.

A transfer is a changing of ownership, such as a security or a financial account, from one party to another. This is a reportable movement of assets from like-kind accounts such as a traditional to traditional, or Roth to Roth. A transfer may alleviate a taxable event because the owner is never in direct control of the asset. The IRA owner fills out a form directing the assets from one custodian/trustee to another. Upon receipt of a transfer request, a financial organization prepares a check, as applicable, and sends it directly to the requesting financial organization. The transfer method may be easier because the assets will not be in the possession of the account holder and can alleviate issues with the IRS.

Discuss your plans for a rollover or transfer with your financial adviser.