Gosh, IRA & 401K Rollovers Are Exciting!!

You are probably wondering why I would have a video or Norm Macdonald on this blog.  It is because the subject matter or IRS rollovers are, well, what should we say….boring!?  But, while boring, it is vital that you know what the rules are so that you know how to execute the rollover.  In this post, we will be focusing on one aspect of the rollover (explained below).  But, whether you are a fan or Norm Macdonald and David Letterman or not, hopefully the video will bring a smile to your day.

Based on IRC (Internal Revenue Code) section 401(a) (31), an individual has the right to rollover eligible funds without incurring a tax liability.  In fact, rollovers are often referred to as “direct” and “indirect” rollovers.  This blog post only addresses “direct” rollovers.  Think of a “direct” rollover as you are not “touching” the rollover check, ACAT or wire transfer personally.

When a direct rollover occurs, the rollover funds are rolled directly from one custodian account to a new custodian account, and are for the benefit of the distributee (you).

Now remember, in the case of a 401K, in most cases the funds coming from one retirement plan into the new 401(k) plan will almost always be considered a rollover.  In the case of a direct rollover, where the distribute and the trustee of the plan are the same (you), how is the funding transaction named, labeled, etc.?  Well, it can’t be payable to you and that would be an IRS Prohibited Transaction.  You are neither the plan nor are you the trustee.  So, that is established.

Well, let’s delve into this more.  In most cases, the 401(k) plan will be established under either a sole proprietorship or an incorporated entity (e.g., LLC, S-Corp, C-Corp).  So, let’s use those two examples:

1)  John Q. Public is a sole proprietor.  As a sole proprietor, he establishes a 401(k) in the name of his sole proprietorship.  Rollover funds would be made payable to the financial institution (e.g., Schwab) holding the account, fbo the John Q. Public 401(k) PSP (Profit Share Plan).

2)  John Q. Public operates an incorporated business under the name of Smarty Pants, Inc.  The plan, as the corporation is the adopting employer, will now be established under Smarty Pants Inc. 401(k).  The rollover funding  would be made payable to the financial institution (e.g., Schwab) holding the account, fb0 Smarty Pants, Inc. 401(k) PSP (John Q. Public, Trustee).

Do yourself a favor when a rollover is ever executed.  Make sure that in no way, shape or form, that you ever touch the funds in any manner.  Yes, there are rules which would allow you to take constructive receipt of the funds, but there is no reason to do this (in most circumstances).  You never want the IRS believing that you have taken a distribution from a plan and, now, owe them taxes and, possibly, early withdrawal penalties.

As always, the information provided in this post is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice.  You must always consult with your respective professional in all situations.