IRA transfers and rollovers are two ways retirement plan owners can move funds or assets from one plan to another. Sometimes the terms are used interchangeably. However, the IRS has defined critical differences between the two transactions that are important for you to clearly understand before undertaking one or the other. This article explains the basic rules and requirements for each.
Transfers and rollovers from one retirement plan to another take place for several reasons. One reason is because an employee has left a former employer who provided retirement benefits, and the employee has the option to move those funds to another account not housed by the former employer. Another reason is the individual simply desires to change plans to one that’s more beneficial or offers them different investing options. For example, funds from traditional IRAs be rolled over or transferred into self-directed IRAs, giving individuals more control over their own retirement funds and investing decisions.
There are two different kinds of rollovers: direct and indirect. Direct rollovers are transactions that occur when you leave a place of employment and want to move your funds from that old employer’s sponsored plan into another retirement plan. Direct rollovers can involve different types of plans, meaning you can rollover funds from an employer-sponsored 401(k) into a traditional IRA or other retirement account.
This is important: When moving funds from an employer-sponsored 401(k) into a personal (i.e. non-IRA) account, the employer is required to withhold taxes in the amount of 20 percent. However, this withholding does not apply to rollovers that flow directly into an IRA (custodian to custodian)—so keep that in mind when choosing which transaction you prefer if you want to avoid tax implications on your hard-earned retirement funds.
Indirect rollovers involve the moving of funds from one plan to another by the account owner actually taking receipt of the monies involved. Keep in mind that receipt of funds constitutes a distribution, but the plan owner has exactly 60 days (from the withdrawal date) to deposit these funds into another retirement plan to avoid taxation on the funds. If the plan owner is less than 59 1/2 years old, a 10 percent penalty may also be applied if the rollover exceeds this time frame. The IRS permits retirement plan owners to perform only one rollover every 12 months regardless of how many plans an individual owns.
Transfers take place when funds are moved directly from one IRA custodian to another. For instance, you can transfer funds from a traditional IRA, housed by a bank, into a self-directed traditional IRA plan administrated by Advanta IRA. Here, the IRA owner does not take receipt of the funds first. Because the funds being moved never leave a plan, taxation and penalties don’t come into play. Additionally, there is no limitation on the number of times plan owners can perform transfers within a 12-month period. Transfers can also involve assets, in which case the investment is moved and retitled into the name of the new account.
401(k) Transfers vs. Rollovers
Understanding the difference between transfers and rollovers and how each transaction works is essential in maintaining your retirement plan’s tax-sheltered status. Advanta IRA advises you to seek appropriate counsel when moving retirement funds to ensure your decisions meet IRS regulations. You can also contact us to learn about self-directed plans—to see if rolling over or transferring funds into a self-directed account with us may be a good fit for you to reach your retirement goals.
If you have questions about this article or wish to learn more about self-directed retirement plans and alternative investments permissible in these accounts, please contact us.