FBO Checks and Rollovers of Retirement Funds

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A For Benefit Of, or FBO, check is a check written to one entity for the benefit of another party. The term FBO means that the money is not supposed to go to the entity or payee to which it was written out. The money is meant for the party named after the “for the benefit of” language.

A payment line for an FBO check should look like this: America Bank c/o Trustees of ABC Plan FBO John Doe. The money should go to John Doe. The point of an FBO check is to allow the financial institution that receives the check to deposit it for the account owner; the account owner does not have to take direct ownership of the funds as an intermediate step.

FBO Checks and Retirement Accounts

An FBO check is typically necessary to effect a rollover, particularly of monies in a retirement account. The FBO check makes it possible for an account owner to move money from a retirement account they are closing to a retirement account they are opening. A rollover helps an account owner avoid an early distribution of funds.

Three Types of Rollovers

An account owner can engage in three types of rollovers: a direct rollover, a trustee-to-trustee transfer or a 60-day rollover. In a direct rollover, the account owner asks their retirement plan administrator to make the payment directly to another retirement plan or to an IRA. The administrator will not withhold taxes from the transfer amount.

In a trustee-to-trustee transfer, an account owner receiving a distribution from an IRA can ask the institution holding the IRA to make the payment directly from one IRA to another IRA or to a retirement plan. The institutions will not withhold taxes from the transfer amount.

In a 60-day rollover, an individual who has received a payment directly to them from an IRA or a retirement plan can deposit all or a portion of the funds in an IRA or retirement plan within 60 days. The financial institution receiving the funds will withhold taxes from a distribution of funds from a retirement plan. This means the account owner must use other funds to roll over the full amount of the distribution.

How an FBO Check Works

The account owner should not endorse, or sign, the back of the FBO check. They should not cash it. The account owner cannot deposit the FBO check in their bank account because the check is made out to the new custodian of the IRA account. The account holder cannot access the funds until the money has been transferred to the new account.

Steps to Transfer Funds

The first step to transferring funds with an FBO check is to confirm that the new plan accepts the type of retirement account the individual wants to roll over. The individual can contact their plan administration to learn more about their plan. The second step is to tell the institution sending the FBO check that the individual wants a direct rollover to the new institution into a new or existing retirement account. If the individual has multiple retirement accounts, they need to choose the account that will receive the FBO rollover check.

The individual should then request the first institution to make the check payable to the second institution for the benefit of themselves (the account owner), and that the check be mailed to the account owner’s attention. The FBO check should include the current plan name and contract number. The third step differs according to institution. Some institutions, such as John Hancock, ask that after the account owner receives the check from the first institution, they should submit an institution-specific form for acceptance of a rollover contribution along with the FBO check to their prior plan administrator. The administrator completes the form and sends the form and the check to the new financial institution.

Other institutions, like Fidelity, ask the account owner to deposit the check via a mobile check deposit, wire transfer, by bringing it to the financial institution, by regular mail or by overnight mail. Typically institutions, like Vanguard, require the FBO check be mailed to them within 60 days of issuance. An account owner should check with their tax advisor to determine whether they owe taxes or early penalties for the distribution of the funds.

Notes on Mobile Deposit

An individual who endorses a check for mobile deposit may need to include the phrase “for mobile deposit only” in the endorsement area. The individual should contact their bank to determine whether this is necessary. If the phrase is necessary but not included, the account owner may see the second institution reject the deposit because of a restrictive endorsement.

Penalties for Withdrawing Money Early

The penalty for withdrawing money early from an IRA, before age 59 ½, is that the funds will be included in the individual’s gross income for the tax year in which the individual withdrew the money. The taxpayer will also need to pay a 10 percent additional tax penalty. There are exceptions to this rule to the 10 percent penalty. For example, an individual will not be penalized for using IRA funds to pay a medical insurance premium after losing their job.

One Rollover Per Year

The IRS has a “one rollover per year” rule. This means an account owner cannot make more than one rollover from the same IRA within one year. The account owner also cannot make a rollover during the year from the IRA to which the distribution was rolled over.

The rule aggregates all of an individual’s IRAs, including SEP and SIMPLE IRAs, traditional and Roth IRAs. It treats them as one IRA to limit the individual. The one-per-year limit does not apply to rollovers from traditional IRAs to Roth IRAs, which are termed conversions; trustee-to-trustee transfers to another IRA; IRA-to-plan rollovers; plan to IRA rollovers; and plan-to-plan rollovers.

Distributions to Be Rolled Over

As to IRAs, an individual can roll over all or part of any distribution from their IRA except the required minimum distribution, which is the minimum amount they must withdraw from their account each year. The other portion the individual may not roll over is the distribution of excess contributions and related earnings.

As to retirement plans, an individual can roll over all or part of any distribution of their retirement plan account except: required minimum distributions, loans treated as a distribution, hardship distributions, distributions of excess contributions and related earnings, withdrawals electing out of automatic contribution arrangements, distributions to pay for accident, health or life insurance, dividends on employer securities or S corporation allocations treated as deemed distributions.

A distribution that can be rolled over is called an eligible rollover distribution. To get a distribution from a retirement plan, the individual must meet the plan’s conditions for a distribution, such as having their employment terminated.

Consequences of Not Choosing

When an individual does not choose which rollover they want to make, the retirement plan administrator is allowed to deposit the money into any IRA in their name. This is true when the plan account is between $1,000 and $5,000, and the account owner has not elected to receive the money. If the plan amount is $1,000 or less, the plan administrator may pay the account owner the amount. The payment will typically be minus 20 percent income tax withholding, without the account owner’s consent. The account owner may roll over the distribution within 60 days.

No Requirement to Receive Rollovers

A retirement plan is not obligated to receive rollover distributions. If a retirement plan accepts rollover contributions from other plans or IRAs, the incoming funds must be permissible rollovers allowed by the plan document, come from a qualified plan or IRA and be the type of funds that are eligible to be rolled over. The incoming funds must be paid into the new plan no less than 60 days after the employee receives the funds from the former plan or IRA. The plan administrator must take reasonable steps to make sure the conditions are met.