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How Direct IRA Transfers Work

SmartAsset: How Direct IRA Transfers Work

You can transfer your retirement plan savings directly to a new individual retirement account (IRA) by contacting your financial institution and requesting a trustee-to-trustee transfer. This action moves money from one retirement plan directly to another without triggering any tax consequences. However, there are some rules you have to follow in order to do it right. To make sure you make the most out of your IRA transfer and avoid tax consequences, you should work with a qualified financial advisor.

What Is a Direct IRA Transfer?

Whenever you’re moving funds from one retirement plan to another, you want to make sure you avoid tax consequences. One way to bypass this is by establishing a direct IRA transfer. This involves one financial institution automatically transferring a balance to a different retirement plan held by another financial institution.

The process is fairly simple. You contact the financial institution that holds your account and request a direct transfer to another retirement plan. This ensures that the money never actually touches your hands. Therefore, no tax consequences are triggered. But if you prefer to do it the old-fashioned way, you can.

Types of IRA Transfers

If you can’t set up a direct transfer, you can have your financial institution send you a check for the balance. However, you’d be responsible for depositing that check with the financial institution that holds your new IRA.

However, you have to make that deposit within 60 days after getting your check or face an early withdrawal penalty unless you’re at least 59.5-years-old. That penalty is usually a 10% early-withdrawal penalty in addition to the ordinary income taxes you pay on the transfer.

This is one of the ways you can move assets into an IRA. In total, you have the following three options:

  • Rollover: You get a check and you must deposit it into a new IRA within 60 days of receiving it.
  • Trustee-to-Trustee Transfer: Your financial institution transfers the balance directly to another financial institution that holds your IRA
  • Same trustee transfer: If you have multiple accounts with the same financial institution, you can have these assets moved across different savings vehicle you

As you can see, a trustee-to-trustee transfer is the easiest and safest way to move assets into an IRA.

Transferring 401(k) to an IRA

Moving your money out of your employer-sponsored 401(k) may be a harder move as most companies want to keep as much money in the plan as possible. So they place rules that restrict moving money out of the plan. However, most accept IRA transfers. So you might just need to fill out some paperwork and make phone calls to the financial institutions that hold your assets.

Can You Transfer a Roth IRA to a Traditional IRA?

SmartAsset: How Direct IRA Transfers Work

In some cases, you may want to convert your Roth IRA to a traditional IRA. You fund these accounts with pre-tax dollars so they effectively reduce your taxable income. In addition, your contributions are tax deductible.

So if you think a traditional IRA turns out to be a better fit, you can initiate a direct Roth IRA to a traditional IRA transfer. To do so, follow the same instructions we listed above.

Bottom Line

While retirement plan savings can get transferred directly to a new individual retirement account (IRA), make sure you follow the rules to avoid triggering tax consequences.

Tips for a Successful IRA Rollover

  • A financial advisor can help you create a financial plan for your retirement needs. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Retirement savings is key to a successful financial plan. See how much money you’ll need for retirement using SmartAsset’s retirement calculator.
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