How Direct IRA Transfers Work

If you want to move your individual retirement account (IRA) balance from one provider to another, you can simply call your current provider and request a trustee-to-trustee transfer. This moves money directly from one financial institution to another without triggering taxes. However, there are some rules you must follow to do it correctly.

For help planning and investing for retirement, consider working with a financial advisor.

IRA to IRA Transfer

The easiest types of transfers you can initiate for retirement plans are the ones involving the same type of account. Say you opened a traditional IRA with one financial institution, but you found a better option with another financial institution, maybe with lower fees or better fund options.

The first step is gathering your current account details, including passwords, account numbers and statements. You should also gather information from the receiving financial entity, such as their main address. You may need this when you contact your financial institution to request a trustee-to-trustee transfer or direct transfer. 

This type of transfer ensures your money moves electronically from one financial institution to another without ever reaching your hands. As a result, you avoid any tax consequences. Otherwise, the bank or other entity may send you a check for the current balance, possibly triggering a tax penalty. 

To avoid paying taxes and being penalized (for those younger than 59 ½ years old), you must deposit the check in a different IRA account within 60 days of the check’s issue date. If you miss the time window, the IRS considers the amount sent to you as a distribution. If you’re under 59 ½ years old, the distribution will also typically trigger a 10% early withdrawal penalty.

IRA to Roth IRA Conversion

People who want to transfer their IRAs often convert an IRA to a Roth IRA. If you’re remaining with the same financial institution, simply request a conversion. However, the transfer amount will be reported as income, so you will owe income tax on it.

Of course, this assumes that you funded your traditional IRA entirely with pre-tax money. However, it is also possible to make after-tax contributions to a traditional IRA. This is known as a non-deductible IRA. 

In this case, you may not owe taxes for a Roth IRA conversion if there have been no gains. Otherwise, you owe taxes on the gains only and on any portion of your balance that was funded with pre-tax money. If the conversion tax seems too big to take on all at once, you can move your IRA balance into a Roth IRA in portions each year. 

Overall, a backdoor Roth IRA conversion can be quite complex. It’s a good idea to consult a qualified financial advisor before making this move.

401(k) to IRA Direct Rollover

Another kind of IRA transfer is a rollover, which is when you move your 401(k) balance to an IRA. Typically, this is done after leaving a job by contacting your 401(k) plan administrator and requesting a direct rollover from your 401(k) into your IRA. By using this specific language, you avoid the same tax consequences mentioned above.

In the retirement plan world, rollovers and transfers are actually different. The IRS generally defines a rollover as the movement of funds from a qualified plan that’s not an IRA, such as a 401(k), directly into an IRA. The process simply involves different paperwork because you must report the move to the IRS.

You also have the option of an indirect rollover. In this case, your 401(k) plan provider sends you a check for your balance. You then have 60 days to deposit it into an IRA or face tax consequences. The IRS permits you to perform indirect rollovers once every 12 months.

One exception to the IRS regulations is if your account holds less than $1,000; in this case, your employer will likely close the account and send you a check for the total balance. This check will have already subtracted income taxes. 

The IRS will not impose its early withdrawal penalty if you deposit the money into another qualified retirement account within 60 days. If you don’t, the government will tax the money to the fullest extent, which includes taxes on both income and an early withdrawal if you are younger than 59 ½.

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Can You Transfer a Roth IRA to a Traditional IRA?

While transferring a Roth IRA from one financial institution to another is a perfectly normal transaction, you can’t transfer Roth assets to a traditional IRA. 

Since you’ve already paid taxes on your Roth IRA contributions, converting or transferring those assets to a traditional pre-tax account isn’t possible. The IRS provides a useful chart that helps you visualize which types of rollovers are and aren’t allowed. As shown, Roth-to-traditional-IRA rollovers aren’t permitted.

The IRS previously allowed Roth conversions to be reversed if a taxpayer had second thoughts about their conversion or suddenly needed their tax money back, but the Tax Cuts and Jobs Act of 2017 banned the recharacterization of Roth conversions. Now, when you convert pre-tax contributions into Roth assets, the process is permanent and cannot be reversed.

Common IRA Transfer Mistakes to Avoid

IRA transfers are common, but errors still occur. 

• Transfer: One issue is requesting an indirect rollover instead of a trustee-to-trustee transfer. This can introduce reporting requirements and timing rules that may lead to taxes or penalties if the deadline is missed.
• Account type:  Transfers between the same type of IRA are usually straightforward, but moving money between traditional, Roth and employer-sponsored plans involves different tax treatments. If you fail to assign funds as pre-tax or after-tax, it can result in unexpected taxable income, especially during conversions.
• Timing: Indirect rollovers are subject to a strict 60-day deadline and annual limits. Missing either rule can cause the transfer to be treated as a distribution, which may trigger income taxes and penalties depending on age.
• Administrative errors: Incorrect account titles, mismatched beneficiary information or incomplete custodian instructions may delay processing and increase the chance of mistakes during the transfer process.

Bottom Line

The simplest kind of IRA transfer is a trustee-to-trustee or direct transfer. The financial institutions that are involved in a direct transfer will move the money between each other. You can request a direct transfer from an IRA to another IRA account or a traditional IRA to a Roth IRA account. To move funds from a 401(k) to an IRA, request a direct rollover. Again, the providers will shift the money between each other. By making a direct rollover or direct transfer between IRA accounts, you avoid triggering taxes. 

Retirement Planning Tips

• Planning for retirement can be complex and overwhelming, but a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool  matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you’re thinking about moving your IRA, take a look at our reviews of available IRA and Roth IRA plans.
• In addition to the money in your IRA, you should also account for Social Security. To find out how much you can expect to receive from the government each year, use our Social Security calculator.

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