Pros and Cons of indirect rollover. TSP account to index annuity account.

[Tim Lumbao]

"What do they mean by this? Can someone who's experience in annuity dumb it down for me please… "Choosing an indirect rollover also means that your plan withholds 20% of your savings for federal income tax. That's taken right off the top before you get any remaining funds. So again, that's another argument for choosing a direct rollover instead since doing so would allow you to avoid the withholding"

 

[BeeSelective]

If one does not do a direct rollover, taxes are are withheld.

 

[BeeSelective]

That would apply to qualified retirement plans.

 

[LostDollar]

Caveat, NOT an agent.

https://www.investopedia.com/terms/i/indirect-rollover.asp

Bolding in the following quote is mine:

Personal financial advisors and tax advisors pretty much unanimously advise their clients to always use the direct rollover option, not the indirect rollover.

(in the last few weeks I was almost yelling at a bank's branch manager telling her I wanted a trustee to trustee transfer for an IRA transfer when I overheard comments in her discussion with her technical support staff that suggested to me she was getting ready to cut me a check directly. Because of this and a prior experience, I have just stopped being embarrassed when I emphasize to a financial institution CSR that I want a trustee to trustee transfer, BECAUSE I am liable for the consequences of incorrect action, regardless of how many good intentions the csr has.)

The only reason to use the indirect rollover is if the account holder has some urgent use for the money, and it can be accomplished without risk within 60 days.

If not accomplished properly, an indirect rollover can leave you owing income taxes, an early withdrawal penalty, and even an excess contributions tax.

 

[DHK]

All terminated retirement plan participants are required to have received IRS Special Tax Notice 402(f) before moving forward with their options.

Most 401(k) plans have 5 major options for those who are no longer employed and have a plan balance to move:
1) Leave it with the 401(k) plan (unless they are forcing you to move it)
2) Direct Transfer trustee to trustee. The check is payable to your next chosen IRA custodian for your benefit or FBO.
3) IRA Rollover. For an IRA rollover, the check is payable to YOU with a mandatory minimum 20% of the gross amount withheld for taxes. It's up to you to get those funds to an IRA within 60 days, or the entire amount becomes taxable as income in that tax year.
4) Cash it out directly - knowing that it is subject to federal, state, and penalties prior to age 59 1/2 years old
5) You can choose a lifetime annuity option for your life, or joint and survivor payout. This is not the same as choosing your own annuity contract as this is done by the plan custodian.

Anyway if you look up a 402(f) special tax notice, you'll generally see these options. Here's one:
https://www.varetire.org/pdf/publications/irs-402f.pdf

Please note that there is the "Age 55" rule. If someone is age 55 and separated from service, they can withdraw funds directly from their 401(k) plan and not pay the 10% penalty. However, if they move those funds to an IRA and withdraw from the IRA, THAT is subject to the 10% penalty.

[EXTERNAL LINK] - Using the Rule of 55 to Take Early 401(k) Withdrawals - SmartAsset

If they did move the money to an IRA and still desire to access the funds prior to age 59 1/2 without paying the 10% penalty, they can elect to do a 72(t) distribution schedule for the longer of 5 years or until they reach 59 1/2. There are specific formulas (although it's easier since Secure Act 2.0 as it seems to be a flat 5% distribution amount), but if you change it during that 72(t) distribution schedule, it retroactively is penalized the 10% penalty from the first one.

https://www.investopedia.com/terms/r/rule72t.asp

 

[DHK]

Now, since the OP is referencing a TSP, those are not 401(k) plans but essentially are 403(b) plans. (I can't think of why they wouldn't be a 403(b).)

But 403(b) plans aren't qualifed plans, but they do have similar rules.

One thing to be aware of is to ask if there are any surrender charges that may be on the current plan balance. TSPs are often invested in annuities or mutual funds. If they are annuities, they may not necessarily have non-rolling surrender charges. Which means that surrender charges are based on the dates each contribution is received, not the length of time the contract has been in-force.

For example: You set up a TSP with a 7-year contract. You put in $500 a month, each month, for many years.

Let's say 10 years go by. Your first 3 years of contributions are out of surrender. The remaining will be subject to the surrender schedules based on the years remaining as premiums were paid into the contract.

But... if it was a non-rolling surrender charge schedule... then after 7 years (in this example), you can move the entire plan balance without surrender charge regardless of when the premiums were paid in because the contract is older than the original 7 year surrender schedule.

So you'll want to know this before moving the funds.

 

[Allen Trent]

Now, since the OP is referencing a TSP, those are not 401(k) plans but essentially are 403(b) plans. (I can't think of why they wouldn't be a 403(b).)/QUOTE]

For some reason, I don't believe a TSP is technically either a 401k or 403b. However, for most purposes of rolling/transferring, they are all treated the same

 

[Allen Trent]

"What do they mean by this? Can someone who's experience in annuity dumb it down for me please… "Choosing an indirect rollover also means that your plan withholds 20% of your savings for federal income tax. That's taken right off the top before you get any remaining funds. So again, that's another argument for choosing a direct rollover instead since doing so would allow you to avoid the withholding"

From the way you are explaining it, you want to rollover your current TSP plan to an IRA index annuity.

First question is Do you still work for that same employer? If so, ig is unlikely you can do an "in service" distribution, but ask your plan administrator

If you no longer work there, you definitely want to create the new IRA index annuity at the insurance company first. Get the policy number created & the exact mailing address or electronic banking information of your new index annuity carrier so that you can provide your TSP custodian those details to get them to do a direct rollover from current custodian to new custodian.

It really is never a good idea to do an indirect rollover. Couple issues:

1. the possible 20% tax withholding will mess up your taxes bad by having 20% taken out & sent to IRS. When you file your taxes the next year you would have to prove you rolled over the 80% plus put 20% of your own money with it to avoid any taxes. If you don't, you will still be taxed on at least the 20% the distributed to the IRS

2. By law, a taxpayer can only do 1 60 day indirect rollover per year......no matter how many plans you have at different places/IRAs. Getting a 2nd one can cause some major tax problems

Best to always get qualified rollovers/transfers direct between custodians so that the 1099 reports it as direct rollover.

With non qualified plans like Non qualified annuity or life insurance, there is no indirect transfer, the only legitimate 1035 exchange on non qualified is when it goes directly from insurance carrier to insurance carrier

 

[scagnt83]

To actually dumb it down.

If you do a rollover with your TSP, which means cashing it out to your bank account.... then "rolling" it into an IRA.

The TSP provider will withhold 20% for taxes.



If you do a Direct Transfer to an IRA, meaning it never touches your bank account, it goes directly from the TSP custodian to the new IRA custodian.

They dont withhold 20%.

---

Always do a Direct Transfer unless for some odd reason its not possible.

 

[adjusterjack]

I've always done direct rollovers so the tax wasn't an issue.

But I have taken substantial distributions which were not rolled over into any qualifying account.

In those instances I was able to elect not to have anything withheld. The election, of course, came with the warnings about estimated tax and penalties but that was of no concern to me.

If one is doing an indirect rollover one may have the option of nothing withheld. When the deposit to another qualified account is done within the 60 day limit, it should be an offset with no need for estimated tax and no penalties.