Anyone who’s ever put together furniture or hung a picture on a wall knows the difference between a screw and a nail. While they may look alike, they have distinct purposes and applications. The same can be said for an IRA transfer vs. rollover.
An IRA transfer involves moving retirement assets from an IRA at one institution to an IRA at another. A rollover, on the other hand, is the transfer of money to an IRA from a different type of retirement account, like a 401(k). Yes, they’re very similar, but there are important differences – especially when it comes to your taxes. A financial advisor can help you manage your retirement savings, complete a rollover and more.
What Is an IRA Transfer?
An IRA transfer occurs when you move your account from one custodian to another. Perhaps you find a bank or brokerage that charges lower fees than the one currently holding your IRA. Maybe you want more investment options than what your current provider offers.
Whatever your reason for making the move, keep in mind that a transfer involves moving assets between the same type of account: an IRA.
So how does it work? Transferring your IRA from one place to another is like moving money from a savings account at your current bank to a saving account at a new bank. You simply contact your current provider and request a trustee-to-trustee transfer. Your current custodian then directly transfers your IRA to the new provider.
What Is an IRA Rollover?
A rollover happens when you move funds from one type of retirement account into another. This is common when people change jobs. They take their money out of their employer-sponsored retirement plan and roll it into an IRA, which they control.
A rollover can involve moving assets from any of the following plans into an IRA:
Meanwhile, there are two methods for completing an IRA rollover: directly and indirectly. Here’s a look at each.
Indirect rollover: An indirect rollover requires you – the account owner – to take possession of your assets and then deposit them into your IRA. After requesting an indirect rollover, your plan administrator sends you a check (more on this below), which you’re responsible for depositing into your IRA within 60 days. An indirect rollover is also called a 60-day rollover, because failing to complete the transaction within 60 days may leave you paying taxes on the money, and potentially, an early withdrawal penalty of 10%.
Direct rollover: Like a trust-to-trustee transfer, a direct rollover means you’ll never take possession of your assets. Instead, your current retirement plan administrator sends a check directly to your new IRA custodian, making the process much easier on you.
Tax Differences Between an IRA Transfer vs. Rollover
Both IRA transfers and direct rollovers are relatively straightforward and don’t carry any significant tax implications. You won’t be required to pay taxes on either transaction, but you do need to report a direct rollover on your federal tax return.
Indirect rollovers are a different story. As mentioned earlier, you have 60 days to complete an indirect rollover. Failing to deposit the funds into your IRA within that time frame means the IRS will treat the withdrawal as a distribution. You’ll owe income taxes on the money and a 10% early withdrawal penalty if you’re younger than 59.5.
- Keep in mind: Rolling any pre-tax money into a Roth IRA, even with a direct rollover, will require you to pay income taxes on the transaction.
Another key component of indirect rollovers: income tax withholdings. When your employer-sponsored retirement plan sends you a check as part of an indirect rollover, they’ll withhold 20% of your account balance for tax purposes. Here’s the catch: If you want to defer taxes on your full savings, you’ll need to come up with 20% from other sources and deposit it into your IRA. The IRS will later refund you for this 20%.
For example, imagine using an indirect rollover to move $50,000 from your former employer’s 401(k) into a traditional IRA. Your plan sponsor will send you a check for $40,000 and withhold 20%. You’ll then need to deposit the full $50,000 into your IRA within 60 days, supplementing the $40,000 with $10,000 from another source.
While closely related, IRA transfers and rollovers are not the same. A transfer occurs when you instruct your custodian to move your assets from your current IRA to an IRA at another institution. A rollover, on the other hand, involves transmitting retirement assets to an IRA from a different type of account, like a 401(k) or 403(b). The IRS also treats them differently. While there aren’t any tax implications for IRA transfers or direct rollovers made to a traditional IRA, you could owe taxes and an early withdrawal penalty if you fail to execute an indirect rollover within 60 days.
Retirement Saving Tips
- A financial advisor can help you calculate how much money you’ll need to save to have the retirement you want. Finding a qualified financial advisor doesn’t have to be hard. 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.
- Fidelity’s rule of thumb dictates that you should have three times your annual income saved by age 40 and eight times your annual income saved by age 60. That number jumps to 10 times by age 67. If you’re behind on your retirement savings goals, consider increasing your contributions every year.
- If you can afford it, maxing out your retirement accounts can really boost your savings. In 2023, the IRS allows you to save up to $22,500 in a 401(k) or similar account, and $6,500 in an IRA. If you’re 50 or over, the IRS allows you to make catch-up contributions of $7,500 and $1,000 to your 401(k) and IRA, respectively.
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