A self-directed IRA rollover is a way to fund and manage an individual retirement account (IRA). It is typically controlled by the client with the help of a financial advisor, often a stockbroker. The act of “rolling over” funds takes money from one account and transfers it into another. There are two ways to accomplish this exchange, a traditional rollover and a direct transfer.
The self-directed IRA rollover is first and foremost a movement of funds. It is an event where money is “rolled over” from one account into a different one. There has been some confusion over the term rollover versus the term transfer. In a classic rollover, the money passes through the investor, while in a direct transfer, which is often called a direct rollover, the financial institutions exchange the funds directly.
For a true self-directed IRA rollover in the United States, as defined by federal Internal Revenue Service rules, the money must be withdrawn from the account in its entirety. It is then sent to the investor, usually in the form of a check. He or she must then invest it in a self-directed retirement account within 60 days of receiving the money. Taxes and penalties may apply to this classic rollover scenario, including a 20% withholding rule. Rollovers are typically reported to the IRS.
On the other hand, in a direct IRA transfer, the financial institutions exchange the funds directly, without sending a check to the investor. This process is typically simpler for individuals to manage than the true rollover, and does not usually face the same threat of fees. As a rule, these transfers are not reported to the IRS.
The term self-directed IRA rollover suggests that the funds within the retirement account will be invested by the individual, rather than by a company on the individual’s behalf. Many traditional IRAs do not allow their clients or employees to control their own investments. For the most part, self-directed funds let individuals take responsibility for contributing to the investments themselves, rather than relying on their employer to make contributions, or to withdraw money from the employee’s salary.
Also, in a self-directed IRA rollover, the investor may wish to enlist the help of a stockbroker in making investments. Having the help of an expert in the field may aid the client in navigating investment options. Also, stockbrokers typically know how to work within the IRS rules involved in creating and managing a self-directed retirement account. This knowledge may help an individual avoid paying extra taxes and fees.
