Anyone who has ever assembled furniture or hung a picture on the wall knows the difference between a screw and a nail. Although they may look similar, they have distinct purposes and applications. The same can be said for an IRA transfer versus a rollover.
An IRA transfer involves moving retirement assets from an IRA in one institution to an IRA in another. A rollover, on the other hand, is the transfer of money to an IRA from another type of retirement account, such as a 401(k). Yes, they are very similar, but there are important differences, especially when it comes to your taxes. A financial advisor can help you manage your retirement savings, rollover and more.
What is an IRA transfer?
An IRA transfer occurs when you transfer your account from one custodian to another. Perhaps you have found a bank or brokerage that charges lower fees than the one that currently holds your IRA. Maybe you want more investment options than what your current provider offers.
Whatever your reason for moving, keep in mind that a transfer involves moving assets between the same type of account: an IRA.
So how does it work? Moving your IRA from one place to another is like moving money from a savings account at your current bank to a savings account at a new bank. Simply contact your current provider and request a trustee-to-trustee transfer. Your current custodian then transfers your IRA directly to the new provider.
What is an IRA rollover?
A rollover occurs when you transfer funds from one type of retirement account to another. It’s common when people change jobs. They withdraw their money from their employer-sponsored retirement plan and transfer it to an IRA, which they control.
A rollover can involve the transfer of assets from one of the following plans to an IRA:
In the meantime, there are two methods for performing an IRA rollover: directly and indirectly. Here is an overview of each.
Indirect bearing: An indirect rollover requires you, the account holder, to take possession of your assets and then deposit them into your IRA. After you request an indirect rollover, your plan administrator sends you a check (more details below), which you are responsible for depositing into your IRA within 60 days. An indirect rollover is also called a 60-day rollover because failure to complete the transaction within 60 days may result in you paying taxes on the money, and potentially a 10% early withdrawal penalty.
Direct bearing: Like a trust-to-trustee transfer, a direct rollover means you 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 for you.
Tax differences between an IRA transfer and a rollover
IRA transfers and direct rollovers are relatively straightforward and do not have significant tax implications. You won’t be required to pay taxes on either transaction, but you must report a direct rollover on your federal tax return.
Indirect bearings are another story. As mentioned earlier, you have 60 days to perform an indirect rollover. Failure to deposit the funds into your IRA within that time means the IRS will treat the withdrawal as a distribution. You will have to pay taxes on the money and a 10% early withdrawal penalty if you are under 59.5 years old.
Keep in mind: Rolling any pre-tax money into a Roth IRA, even with a direct rollover, will require you to pay taxes on the transaction.
Another key component of indirect rollovers is income tax deductions. When your employer-sponsored pension plan sends you a check as part of an indirect rollover, it will withhold 20% of your account balance for tax purposes. Here’s the catch: If you want to defer taxes on all of your savings, you’ll have to find 20% from other sources and deposit it into your IRA. The IRS will refund you this 20% later.
For example, imagine using an indirect rollover to move $50,000 from your former employer’s 401(k) to a traditional IRA. Your plan sponsor will send you a check for $40,000 and withhold 20%. You will then need to deposit the entire $50,000 into your IRA within 60 days, supplementing the $40,000 with $10,000 from another source.
Although closely related, transfers and IRA rollovers are not the same. A transfer occurs when you instruct your custodian to transfer your assets from your current IRA to an IRA at another institution. A rollover, on the other hand, involves passing retirement assets to an IRA from a different type of account, such as a 401(k) or 403(b). The IRS also treats them differently. While there are no tax implications for IRA transfers or direct rollovers made to a traditional IRA, you may owe taxes and an early withdrawal penalty if you fail to complete an indirect rollover within 60 days. .
Tips for Retirement Savings
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 difficult. SmartAsset’s free tool connects you with up to three licensed financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Fidelity’s rule of thumb states that you should have three times your annual income saved by age 40 and eight times your annual income saved by age 60. This number increases to 10 times at age 67. If you’re behind on your retirement savings goals, consider increasing your contributions each year.
If you can afford it, maximizing 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 older, 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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