When rolling over funds into an American Estate & Trust (AET) Self-Directed IRA (SDIRA), the primary difference between a direct and indirect rollover is who receives the funds and how the check is made payable. A direct rollover, also referred to as a transfer request, ensures a seamless and tax-free transition, while an indirect rollover requires additional steps and potential tax withholding.
Direct Rollover (Transfer Request)
A direct rollover, commonly called a transfer request at AET, occurs when funds are transferred directly from a previous custodian to AET without the account holder taking possession of the money.
Key Features:
- Check Payable to AET: The funds are made payable to AET for the benefit of (FBO) the client’s IRA, ensuring a tax-free transfer.
- No Tax Withholding: Since the account holder never takes possession of the funds, there is no automatic tax withholding.
- No Time Limit: There is no 60-day deposit requirement.
💡 Example: Rolling over funds from a 401(k) by instructing the plan administrator to issue a check payable to “American Estate & Trust FBO [Client’s Name] IRA”.
Indirect Rollover
An indirect rollover involves the account holder receiving the funds and then personally depositing them into their AET IRA within 60 days.
Key Features:
- Check Payable to the Client: The previous custodian issues the distribution in the account holder’s name.
- Rollover Certification Required: The client must submit a rollover certification document to AET, confirming the deposit qualifies as a rollover.
- Tax Withholding Risk: Employer-sponsored plans (e.g., 401(k)s) withhold 20% for taxes, requiring the client to cover this amount when depositing into the new IRA.
- Limited to One Per Year: The IRS allows only one indirect rollover per 12-month period for IRAs.
💡 Example: A client receives a $50,000 check from their 401(k), deposits it into a personal account, and then transfers the full amount to AET within 60 days along with a rollover certification document. If the original distribution had tax withholding, the client must replace the withheld amount to avoid taxes and penalties.
Key Differences at a Glance
| Feature | Direct Rollover (Transfer Request) | Indirect Rollover |
|---|---|---|
| Who Receives Funds? | Sent directly to AET | Sent to account holder |
| Check Payable To? | AET FBO Client’s IRA | Client’s name |
| Tax Withholding? | No | Yes (20% for employer plans) |
| Time Limit? | No | Yes (60 days) |
| Rollover Certification Required? | No | Yes |
| IRS Penalties if Not Completed? | No | Yes (if late or incomplete) |
| Rollover Limitations? | No restrictions | 1 per 12 months (for IRAs) |
Which Should You Choose?
A direct rollover (transfer request) is the preferred method for transferring funds into an AET IRA because it eliminates tax withholding, avoids the 60-day deadline, and simplifies compliance. An indirect rollover may be necessary in some situations but requires careful handling to avoid tax consequences.
For assistance with rollovers, contact AET Support or consult a financial professional to ensure your
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