Difference Between a Rollover and a Transfer

When it comes to rollovers or transfers between 401k accounts and IRA accounts, one word makes a lot of difference. So, what exactly is the difference between a rollover and a transfer?

A 401k rollover requires that 20 percent of the amount being rolled over be withheld for taxes, even though the IRS still requires the account owner to deposit 100 percent of the amount within 60 days to avoid taxes and penalties. This means that the account owner has to come up with that 20% on his own, and be sure to deposit it with the 80% proceeds he actually receives.

A 401k transfer requires no withholding and moves the funds tax-free. As a result, a 401k transfer is better than a 401k rollover in most cases.

ira transfer 401k rollover


Likewise, an IRA rollover gives the account owner 60 days to deposit any rolled over funds into a new IRA account. IRS rules limit each taxpayer to only one rollover per year.

An IRA transfer moves the money directly to a new qualified retirement plan account with no delays and with no one per year limits. While many of these rollovers are handled electronically, some are done by a check made out FBO the account owner.

So, what does FBO mean on a check?

FBO Check – For Benefit Of

A trustee-to-trustee transfer occurs when you move funds from one qualified retirement plan custodian to another without ever having control of the money. The easiest way for the IRA owner to do this is electronically with the the financial institutions moving the money from one account to the other by computer. However, it isn’t the only way it is done.

Some IRA banks and brokerages send the account owner a check. This is easier on them because they don’t have to interface their account systems with another bank’s account systems. If they make the check payable to you, however, you have taken control of the funds and started a rollover, not a transfer. That would be a big problem for you.

It all comes down to three little letters on the check: FBO. Ever wonder what FBO stands for on a check?

FBO stands for “for benefit of” and it is a method of writing a check to you, without actually writing a check to you. Your IRA FBO check keeps you from taking control of the funds.

An FBO check is a third-party check. In this case, the check will be made out to the new IRA custodian, usually a bank or brokerage firm, for your benefit. That makes all the difference in the world.

Do I Endorse a 401k Rollover Check?

Now you’re wondering, Do I sign the back of a 401k check? No.

As the FBO on the check, you do not endorse the check, or sign the back of it. You cannot deposit the check in your bank account. You cannot cash the check. The check is not made out to you. It is made out to Vanguard or Fidelity or whoever is your new IRA company.

The FBO means that you will eventually be the final recipient of the funds. Merrill Lynch can’t just cash your check either. That would violate the FBO portion of the payee. However, you do not get control of the funds until … they are already in your IRA. Viola! Trustee-to-trustee transfer, and not a rollover!

If you are trying to do a transfer and not a rollover and you get a check from your old 401k company or IRA company that is made out directly to you (without the FBO) return the check immediately. Cashing the check or depositing it is the worst thing you can do because that gives you control over the funds and turns your transaction into a rollover.

Your new retirement plan bank or brokerage should help guide you through the process, but it is always smart to know what is going on before you get started. Once your funds are deposited with them, you go back to normal IRA business, being able to make trades in your IRA account, and getting charged the typical IRA fees.

All of this information is contained deep in the bowels for IRS publication 590-A, if you ever want to go read the exact rules for yourself.



14 thoughts on “Difference Between a Rollover and a Transfer”

  1. I HAD A CD IRA THAT HAD ONE DAY AND ONE YEAR TO TERM. I HAD IT TRANSFERED FROM CHASE BANK ENTIRE AMOUNT TO HOME SAVINGS BANK FBO WITH MY NAME. CHASE TOOK OUT 2% OF face amount for penalty. They said if it was checked marked Direct Rollover and not Transfer there would not be a penalty. They took out $777.00. They will not give my money back. Do you think this correct?

    Reply
    • It depends. If it was a penalty for transferring the CD, that is from the bank and has nothing to do with taxes. Otherwise, they should have done normal tax withholding, but it wouldn’t be a penalty. Banks don’t collect tax penalties. The IRS does that when you file your taxes.

      Reply
  2. MY Chase JP MORGAN IRA CD account was converted in November 2017 to New York life annuity and this roll over was done by Chase JP MORGAN directly to New York Life. I have exercised my 30 days free look ANNUITY and notify New York Life for cancellation and give them a new CHASE JP MORGAN IRA CD account to transfer directly the IRA funds but ignored by NYL and instead the check will be mailed payable to me because the account where it was taken is closed. Am I going to be taxed if i deposited this check directly to new Chase JP Morgan IRA CD account? Did One IRA rollover rule a year is not applied on my situation?

    Reply
  3. Is a 401k direct rollover check made out to an institution FBO the owner required to be deposited within 60 days if the check was sent to the owner? Or can the 60-day limit be extended since the owner does not really have access to the funds until it is forwarded to the institution? Is there a penalty if the check is not forwarded to the institution within 60 days?

    Reply
  4. After I left my old job, I had plans to transfer my 401k to an IRA. My old 401k company told me that a direct rollover was not an option, and that they would have to send the check to me and then I could send it to the IRA company. Well, being that this was my first time dealing with a rollover, I assumed that the check would be made payable to me since they said that the check would need to be sent to me first because they (my old 401k company) did not advise that I need to request to have the check be made payable to the new IRA plan. So, I made the mistake in requesting my old employer (via a Distribution Election Form) to send me the check (payable in my name) because that’s what I thought I was advised to do. When I received the check, I noticed that 20% was withheld and I was NOT happy! So I started googling and stumbled upon your article and learned that I was NOT SUPPOSED TO HAVE THE CHECK MADE PAYABLE TO ME!! Grrr!! As you can tell, I am very, VERY frustrated…mainly with the fact that my old 401k company did not advise me (a novice) properly. So, my question to you is…do I need to contact my old 401k company and let them know that I need to return the check and have them re-issue a new one that’s payable to the new IRA plan? Or am I SOL? (Please don’t say that I’m SOL!)

    Reply
    • If you did not cash or deposit the check, there are probably options. Call your old 401k company immediately, though because the clock ticks on these things whether you do anything with the check or not.

      Reply
    • You can transfer your IRA to your 401k if, and only if, the only funds transferred are funds that came from another pre-tax retirement fund like an earlier 401k or 457. However, your current plan has to allow such transfers, not all of them do. Assuming this is all true, such a transfer would be tax-free and penalty-free.

      IRA dollars (either Roth or traditional) contributed directly to an IRA cannot be rolled or transferred into a 401k.

      Reply
      • My Grandmother retired about a Year ago and just recieved her second retirement Check. But, it says “Pay To The Order of: Her Name & The Name of her Bank” Why does it have the name of her Bank on the ‘Pay To The Order Of part?

        Reply
  5. Make sure you do it as the transfer though and not the rollover just like it says in the article. The rollover would suck because your current plan would take 20% out for taxes. Then you would be responsible to put 100% back into the new account or get penalized for the 20% you never got.

    Reply

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