If you’re saving for retirement, I’m sure you’ve heard the terms “transfer” and “rollover” before— that’s how you get your funds into your IRA! But unless you work in the financial industry, these terms may mean the same thing to you. You’re moving your money from one retirement company to another— that’s the part that matters.
But, there are important distinctions between the two— differences that matter to the IRS. There are different rules and requirements that can impact your taxes if reported incorrectly. Are you trying to move your retirement savings into a self-directed IRA? If you’re unsure about the process and want more details, this article breaks down the differences.
Transfers: What You Need to Know
An IRA transfer is the most basic way to move funds from one IRA to another. The funds are moved directly from one IRA provider to another— you don’t see the money at all— and this transaction is not reported to the IRS. You can transfer your account as many times as you want in any time frame you want— there are no limits or restrictions on these transfers between IRAs and providers.
Keep in mind, when transferring IRAs, your account must be going into an acceptable account type— meaning your Traditional IRA cannot transfer into a Roth IRA, at least without performing a Roth Conversion.
If you are unsure of your options for account type, we expand further in the “How Do I Start the Process?” section below.
Rollovers: Basics for Self-Directed Investors
There are two things the IRS refers to as a rollover.
- A direct rollover is when moving funds from a qualified retirement plan that is not an IRA, like a 401(k) plan, into a Traditional IRA. The funds are sent directly from one provider to another, so you don’t see the funds before they hit your new account. In practice, this is a lot like a transfer but with different paperwork— but the IRS knows it happened, whereas with a transfer they do not. Don’t worry— though this is reported to the IRS, you won’t pay taxes on your funds since you are rolling them back into a retirement account.
- An indirect rollover, also known as a 60-day rollover, is one where you personally take possession of the funds before putting them back into an IRA within the 60-day window. For example, you take a distribution by check and deposit those funds into a personal bank account. You then write a check from that account and send it to your new IRA provider within 60 days of the initial distribution to deposit to your account— this is an indirect rollover. You must deposit this money back into an IRA within 60 days to prevent the IRS from taxing these funds.
With an indirect rollover, the IRS only allows one in a 12-month period. This applies to all your individual retirement accounts— you are allowed one rollover, no matter how many accounts you have. For the tax year the rollover occurred, you will receive a 1099-R from the company you are moving the funds from and a 5498 from IRA Resources. If you have additional questions about the process, please let us know— we’re happy to discuss the options with you in greater detail.
How Do I Start the Process?
When moving your retirement fund, the type of your old account must be compatible with your new account for the process to work. If you’re moving funds into the same type as your previous account—success! That’s acceptable and you are on your way to investing.
If you have a Roth IRA, you can only move into another Roth, so make sure you’ve opened the right kind of account.
If you have a Traditional IRA, you can move funds to another Traditional or a SEP IRA. You can also move to a SIMPLE IRA if the right conditions have been met.
SEP IRAs act like Traditional IRAs when moving funds— you can move these accounts to other SEPs and Traditional IRAs.
SIMPLE IRAs can also be moved to a Traditional IRA— but only if you’ve had the SIMPLE IRA open for at least two years. You can move these funds back to a SIMPLE IRA as well, but only after they’ve been in the Traditional IRA for at least two years. You should clarify before opening your account that the plan type is right for your goals and the contributions you hope to make.
Still unsure? This helpful ROLLOVER CHART outlines where you can and can’t move your IRA— accurate for both transfers and rollovers.
How Should I Move My Retirement Fund?
Now for the big questions: Why would someone pick a transfer or a rollover? How do you decide which is the right choice for moving your retirement fund?
It depends on your current plan, the account you want to open, and what you plan on doing with your funds once they arrive. Let’s outline the pros and cons to help you decide:
Pros: You can do an unlimited number of them per year. They’re easy to initiate and very low-hassle.
Cons: They’re slower, you’re dependent on your old custodian to move the money on their timeline.
Pros: Generally faster than transfers, if you need the funds in a hurry. They also give you the option to hold the funds for 60 days (for indirect rollovers) before rolling them back into an IRA.
Cons: You get a limited number of indirect rollovers from an IRA, only one per 12-month period. You can only hold your funds for up to 60 days, and with this time limit you could end up distributing your funds if you cut it close and something goes wrong.
Which option is right depends on your investing strategy— we can’t make that choice for you. But, knowing the differences between transfers and rollovers allows you to make informed decisions about your retirement savings. We recommend that you always consult with a financial professional before making any of these decisions.
Do you have any more questions? Want to know more about how to start the process? Download the free guide.