An indirect IRA rollover occurs when you request the trustee of your IRA to send the funds you want to rollover directly to you, with the intention that you’ll reinvest them on your own into a new IRA through rollover. The problem with this rollover is that there’s a very real possibility that you’ll inadvertently change the tax burden on the money you’re moving, negating the IRA tax benefits for which you set up the IRA account at the first place.

In most cases, transferring your money in a way that changes the tax status from tax deferred to taxable makes little sense.  After all, the entire reason you opened an IRA in the first place was to get out from under an immediate IRA tax burden while you built up money for your retirement years.  For this reason, there are ways to avoid the taxes on your investments that you, as the account holder, need to be aware of.

Of course, the easiest way to earn tax exemptions on your retirement money is to place it into an IRA.  These accounts, by design, will exempt you from an immediate tax burden and defer IRA taxes until you reach retirement age (with the exception of Roth IRAs).  Currently, the IRS has set the minimum retirement age at 59 ½, although you may be able to withdraw funds earlier without penalty under certain circumstances.

But when it comes to IRAs and IRA rollovers, there’s a particular financial maneuver that can open your investments up to an IRA tax burden if you aren’t careful.  While this is a perfectly legal move when it comes to rolling your funds from one account to another, it likely won’t be either the most convenient process and or the most advantageous for your retirement goals.  This maneuver is called an indirect rollover.

Here’s why.  According to the IRS, you have only 60 days to reinvest your money into a new retirement account.  Fail to get the money deposited within that set time and it will be considered a withdrawal, for which you will be subject to ordinary income taxes, early withdrawal penalties (if you’re under age 59 ½) and a mandatory withholding of 20%.  These penalties can be substantial, especially if you’re nearing retirement and have a lot of money invested in your IRA.

To protect your money from IRA taxes, you need to perform a direct rollover instead.  To do that, contact the administrator of the target IRA (the account that’s receiving your rollover) and tell him or her to perform a direct rollover.  This will begin a specific process where the money is sent straight from one IRA into the new IRA.  As the account holder, the money won’t pass through your hands, although you will still retain all the benefits of your investments when you retire.

In a direct rollover, the administrator of the target IRA will contact his or her counterpart at the other IRA to make all of the necessary transfer arrangements.  The transfer may occur in the form of a wire transfer, a check or whatever vehicle is most convenient.  However, the take home message is that the money should not come into your hands.  This is the simplest way to maintain the IRA tax exemption that’s built into the retirement investing system and protect your money as it’s moved from one account to another.