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Transfers vs Rollovers

There are many ways to fund your IRA, whether it is done as a transfer, rollover, or contribution. Often the words “transfer” and “rollover” are used interchangeably; however, there are differences between the two terms. In this article, we will explore the key differences between a transfer and a rollover.

 

Transfer:

Typically the most common, a transfer, is a direct movement of assets from one IRA to another IRA. The account type must be the same for both accounts *(see below). For example, you may move funds from a Traditional IRA at one financial organization to a Traditional IRA that you have at another financial organization.

*The exception to this rule is a transfer from a SIMPLE IRA to a Traditional IRA or a transfer from a Traditional IRA to a SIMPLE IRA, once the two-year waiting period for the SIMPLE IRA has been satisfied.

Examples: Traditional IRA to Traditional IRA, Roth IRA to Roth IRA, SIMPLE IRA to SIMPLE IRA.

Transfers are not reported to the IRS and they are not taxable because the assets were never made payable or distributed to the taxpayer. The assets are moving directly from one  IRA to another IRA. There are no limits as to how many transfers can be done in a year or per IRA.

 

Rollover:

There are two types of rollover transactions: a direct rollover and an indirect rollover as discussed below.

Direct Rollover:

A direct rollover is a direct movement of assets from an IRA to an eligible retirement plan, from an eligible retirement plan to an IRA, or from an eligible retirement plan to another eligible retirement plan. In a direct rollover, the individual does not take constructive receipt of the assets.

Examples: Traditional IRA to 403(b) plan, 401(k) plan to Traditional IRA, 401(k) to 401(k)

Direct rollovers, unlike transfers, are reported to the IRS. However, direct rollovers are not taxable (unless pretax assets from an eligible retirement plan are moved to a Roth IRA) since the assets were never made payable or distributed to the taxpayer. There are no limits as to how many direct rollovers can be done in a year.

Indirect Rollover:

An indirect rollover also commonly referred to as a “rollover,” consists of a distribution from an IRA that is rolled over into another IRA of the same type ** (see below) or to an eligible retirement plan, or a distribution from an eligible retirement plan that is rolled over into another eligible retirement plan or IRA. In an indirect rollover, the individual takes constructive receipt of the assets and it must be completed within 60 days after the date of the receipt of the assets. An individual is allowed only one IRA-to-IRA rollover per 12 month period (this restriction does not apply to an IRA-to eligible retirement plan rollover, an eligible retirement plan-to-IRA rollover, nor to an eligible retirement plan-to-eligible retirement plan rollover).

** The exception to this rule involves a rollover from a SIMPLE IRA to a Traditional IRA or a rollover from a Traditional IRA to a SIMPLE IRA, once the two-year waiting period for the SIMPLE IRA has been satisfied.

Examples: Roth IRA to Roth IRA, Traditional IRA to 401(k) plan, 401(k) plan to 401(k) plan, Thrift Savings Plan to a Traditional IRA

Please refer to our Eligible Rollover Chart for more examples.

 

What should you expect when moving funds?

The stages of moving funds from one institution to another is fairly straightforward. However, there are a few important factors that you should be aware of, to ensure the shortest amount of delay in processing.

  • Prior to completing any paperwork, you should contact the resigning custodian to verify its requirements to move funds.
  • Due to those requirements, the transfer process may take anywhere between 1 to 3 (or more) business weeks, depending on the institution.
  • Virtually all resigning custodians will require you to complete their own paperwork to initiate the process.
  • To ensure the funds are placed in the right account, in the right manner, the titling of your funds is of the utmost importance.

 

To learn more about how to fund your account, please visit our website at trustprovident.com.

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