If you are saving for retirement, you have probably come across the terms “transfer” and “rollover.” This is how you get your funds into your individual retirement account (IRA). However, unless you work in the financial industry, you may think these terms both mean moving your money from one Retirement Company to another.
But, the truth is that these two have differences that matter to the IRS. Your taxes will be affected by various rules and requirements if not reported correctly. If you want to move your retirement savings to a self-directed IRA and not sure about the process, keep reading to know the difference between an IRA transfer and a rollover:
An IRA transfer is the most basic way to transfer funds from an IRA to another. It involves moving funds directly from one IRA provider to another. This transaction is not reported to the IRS. You have the option to transfer your IRA as many times as you ant in any time frame you want. Remember that when you transfer an IRA, your account should go into an acceptable account type. This means your traditional IRA can’t transfer into a Roth IRA without performing a Roth Conversion at least.
How Rollovers Work
Rollovers can be either direct or indirect. A direct rollover is when you move funds from a qualified retirement plan that is not an IRA into a traditional IRA. A good example is a 401(k) plan. It works by sending the funds directly from one provider to another. With this transaction, the IRS knows it took place. But, while this is reported to the IRS, you will not pay taxes on your funds as you are rolling them back into a retirement account.
Meanwhile, an indirect rollover, which is also called a 60-day rollover, is one where you take possessions of the funds before you put them back into an IRA within the 60-day window. For instance, you can take a distribution by check and deposit the funds into a personal bank account within 60 days of the initial distribution to deposit your account. With this type of rollover, the IRS only permits one in a 12-month period. Thus, no matter how many IRAs you have, you are only allowed one rollover.
Rolling over an old 401(k) to an IRA administrator is easy. Usually, they will just ask you to complete a rollover form and contact their team who will walk you through the process. Your chosen administrator will work with you on the best approach for you.