New IRAs may also be opened through a direct rollover
from an employer-sponsored retirement plan.
402A-1, Q&A-5(a) provides that "any amount paid in a direct rollover
is treated as a separate distribution from any amount paid directly to the employee.
Thus same-sex spouses are entitled to survivor annuity protection in pension plans, automatic account balance death benefits in 401(k) and 403(b) plans and have direct rollover
treatment on a spouse's death.
If your client's rollover form from a previous carrier asks what type of distribution this is, you want to be sure to choose a Direct Rollover
A taxpayer may roll over all or part of a distribution from an eligible retirement plan to a Roth IRA (a conversion transaction) either by a direct rollover
to the Roth IRA or by rolling over the amount received within 60 days.
This would also be the case for a direct rollover
to a traditional IRA account-all distributions from the IRA would be fully taxable as income.
Generally, distributions from an employer plan can be rolled over tax-free into another employer plan or IRA by contributing the amount of the distribution to the other plan or IRA within 60 days of the distribution, or by a direct rollover
by the plan to the other plan or IRA.
There was some confusion about whether a plan had to offer a non-spouse direct rollover
to an inherited IRA.
With that as background, the short answer to your question is that currently a direct rollover
of a 401(k) into a Roth account is not permitted--it's first necessary to transfer the funds to a traditional IRA and then convert that into a Roth.
The direct rollover
may not be particularly effective as a short-term strategy for those who itemize their deductions, since the value of their deductions is already taken into account when they file their taxes.
Under the Act, a plan administrator is required to make a direct rollover
of any involuntary distribution of between $1,000 and $5,000 (which is otherwise an eligible rollover distribution) to an IRA established by the administrator, unless the participant affirmatively elects to either roll over the distribution to a different IRA or a qualified plan or to receive it directly.
Distribution Codes G (for direct rollover
to an IRA) and H (for direct rollover
to a qualified plan or tax-sheltered annuity) are used to report direct rollover