If you're saving for retirement, I'm sure you've heard the terms "IRA transfer" and "rollover IRA" before- that's how you get your funds into your IRA without tax penalties! But unless you work at a financial institution, these terms may mean the same thing to you. You're moving your money from one retirement company to another without tax implications- 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 between transfers and rollovers.
Sections
IRA Transfers: What You Need to Know
Rollovers: Direct vs Indirect
How Do I Start the Transfer or Rollover Process?
How Should I Move My Retirement Account?
IRA Transfer Vs. Rollover IRA FAQs
Transfers: What You Need to Know
An IRA transfer is a simple way to move money or retirement assets from one IRA account to another. The money is moved directly between IRA providers without you seeing it. This transaction is not reported to the IRS.
Pre-tax vs. Post-tax Accounts
You can move your account as often as you like between IRA providers or custodians. There are no limits or restrictions on these transfers, which are also known as trustee to trustee transfers.
Keep in mind, when transferring IRAs, your account must be going into an acceptable retirement account type- meaning your Traditional IRA cannot transfer into a Roth IRA, at least without performing a Roth Conversion (strategy for "backdoor Roth IRA").
If you are unsure of your options for account type, we expand further in the "How Do I Start the Process?" section below or contact your plan administrator.
IRA Rollover Chart
This helpful IRS chart outlines compatible IRA transfer and rollover options.
| Roll To | ||||||||
| Roll From | Roth IRA | Traditional IRA | SIMPLE IRA | SEP-IRA | Governmental 457(b) | Qualified Plan1 (pre-tax) | 403(b) (pre-tax) | Designated Roth Account (401(k), 403(b) or 457(b)) |
| Roth IRA | No | No | No | No | No | No | No | No |
| Traditional IRA | Yes3 | Yes2 | Yes2,7, after two years | Yes2 | Yes4 | Yes | Yes | No |
| SIMPLE IRA | Yes3, after two years | Yes2, after two years | Yes2 | Yes2, after two years | Yes4, after two years | Yes, after two years | Yes, after two years | No |
| SEP-IRA | Yes3 | Yes2 | Yes2,7, after two years | Yes2 | Yes4 | Yes | Yes | No |
| Governmental 457(b) | Yes3 | Yes | Yes7, after two years | Yes | Yes | Yes | Yes | Yes3,5 |
| Qualified Plan1 (pre-tax) | Yes3 | Yes | Yes7, after two years | Yes | Yes | Yes | Yes | Yes3,5 |
| 403(b) (pre-tax) | Yes3 | Yes | Yes7, after two years | Yes | Yes4 | Yes | Yes | Yes3,5 |
| Designated Roth Account (401(k), 403(b) or 457(b)) |
No | No | No | No | No | No | No | Yes6 |
| 1 | Qualified plans include, for example, profit-sharing, 401(k), money purchase, and defined benefit plans. |
| 2 | Only one rollover in any 12-month period. |
| 3 | Must include in income. |
| 4 | Must have separate accounts. |
| 5 | Must be an in-plan rollover. |
| 6 | Any nontaxable amounts distributed must be rolled over by direct trustee-to-trustee transfer. |
| 7 | Applies to rollover contributions after December 18, 2015. For more information regarding retirement plans and rollovers, visit Tax Information for Retirement Plans. |
Rollovers: Direct vs Indirect
The IRS refers to rollovers as a rollover IRA. There are two types of rollovers, direct and indirect.
Direct Rollover
A direct rollover is when moving funds from a qualified retirement plan or an employer sponsored plan that is not an IRA (like a 401(k) plan) into a Traditional IRA. The funds are sent directly to the new provider via an electronic fund transfer, like a wire. Because they go from one provider to another, you don't see or touch the funds until 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 aren't subject to early withdrawal penalties on your account since you are rolling them back into a retirement account.
Indirect Rollover
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 a retirement account 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 IRA 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 IRAR Trust. 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 Transfer or Rollover Process?
Account Portability
To move your retirement funds, 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.
It's important to understand what accounts are pre-tax vs post tax. 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. SEP IRAs work like Traditional IRAs for transferring funds- you can transfer these accounts to other SEPs and Traditional IRAs.
You can also transfer SIMPLE IRAs to a Traditional IRA, but this is only possible if the SIMPLE IRA has been active for a minimum of two years.
IRA Contributions
Before setting up your account, ensure that the plan type aligns with your objectives and the contributions you intend to make. It's also wise to consult with your financial advisor about your taxable income and tax returns to select the most suitable account.
Opening a New Account
In order for you to move your retirement savings between institutions, such as transferring your old 401(k) or IRA, you will need to open an account at the institution where the funds will be moving to.
When it comes to planning for retirement, one of the first steps is to select a financial institution that can provide retirement account services. This could be a bank, brokerage firm, or an IRA custodian. These institutions are equipped to handle the various aspects of managing retirement accounts and can offer guidance and support throughout the process.
Investment Options
If your goal is to invest in alternative assets such as real estate, you will need to take an additional step. Traditional retirement account custodians typically limit the investment options to more traditional assets like stocks, bonds, and mutual funds. In order to have the flexibility to invest in alternative assets, you will need to open an account with a self-directed IRA custodian. Be sure to compare companies before you entrust them with your savings.
Opening an account with a self-directed IRA custodian involves a similar process to opening a traditional retirement account. You will need to provide the necessary documentation and complete the required paperwork. The custodian will guide you through this process and ensure that all the necessary steps are taken to establish your account.
Initiate Movement of Funds and Assets
Once you have opened the account, you will need to initiate the transfer (if you have an IRA) from your current institution to the new one. This can usually be done by completing a transfer request form provided by the new institution. The form will typically require you to provide details about your current retirement account, such as the account number and the name of the institution holding the funds.
If you have an old 401(k), you will need to do a Rollover. This process is initiated where the account old account is currently held. Contact the plan administrator to complete the correct forms.
Overall, moving your retirement savings between institutions requires opening an account at the new institution and completing the necessary paperwork to initiate the process. It is important to carefully consider the terms and conditions, fees, and tax implications associated with the transfer to ensure that it aligns with your retirement goals and financial needs.
How Should I Move My Retirement Account?
Direct Rollover vs Transfer IRA
Now for the big questions: Why would someone pick a transfer vs rollover ? How do you decide which is the right choice for moving your retirement plan?
It depends on the type of retirement account, the account you want to open, and what you plan on doing with your funds once they arrive. As explained above, you must know the type of account you have and where it can be moved.
Which Option is Right For Me?
- Same account type (IRA to IRA)
- No IRS reporting required
- No tax implications
- No deposit deadlines
- Unlimited frequencies
- Can move funds from different account types
- IRS reporting required
- Possible tax implications
- One indirect rollover per 12 months
- Stricter timing rules
Which option is right depends on your investing strategy and how fast you need to fund your investment options- we can't make that choice for you. But, knowing the differences between a direct transfers vs rollover 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.
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