With the inevitable change that life brings, you may need to occasionally adjust your retirement strategy. At some point, that may involve moving money from one retirement account to another to simplify your financial life, achieve tax benefits or take advantage of better investment options.
Both a rollover and a transfer allow you to move funds into an IRA, if you decide that's the best choice for your retirement needs. But important distinctions exist between the two. Whether you use an IRA rollover vs. transfer depends on where you currently save your money. So let's take a look at your options—and their tax implications.
What is an IRA rollover?
Some employers allow "in service" rollovers, where current employees send money from their workplace plan to an IRA. However, rolling over retirement assets is more typical for those who have changed jobs or retired. You might find that an IRA has better investment choices than your current account, or that it's easier to manage your assets when they're consolidated into a single IRA.
Although there are annual contribution limits for an IRA, those caps don't apply to rollovers. You can move any amount of funds from a qualified retirement plan into an IRA.
How to perform an IRA rollover
To initiate a rollover, you first need to create an IRA—if you don't own one already—and contact the administrator of your workplace plan for the required paperwork. You typically can request to move your funds into an IRA through either a direct or indirect rollover:
Direct rollover.Here, the administrator for your employer plan sends the money directly to your IRA provider. Though the transaction is reported to the IRS, you typically don't incur any taxes unless you roll pre-tax money into a Roth account (i.e. you perform a Roth IRA conversion). Indirect rollover.Your employer plan sends the funds to you instead of the financial institution. You then have 60 calendar days to deposit those funds into the IRA. If you don't deposit them into the IRA, you have to pay income tax—and potentially an early withdrawal penalty—on the entire distribution.
What is an IRA transfer?
Often, the reasons for transferring IRA money are similar to those of a rollover. If you own more than one IRA, for instance, you might want to consolidate your retirement money so you can better manage your assets. Or you may find a financial institution charges lower fees or provides access to better investment options than your current provider.
How to perform an IRA transfer
To complete a transfer, you first have to open an IRA with your new provider. You then can contact your current IRA custodian or trustee and ask for the form to initiate a transfer request. Your previous custodian then will deliver the funds directly to your new account. Unlike an indirect rollover, the money is never sent directly to you.
What should you do with your last company's 401(k) plan?
IRA rollover vs. IRA transfer: Key differences
Rollovers and transfers have the same basic function, enabling you to move funds into an IRA. But it's important to understand differences between these two procedures if you plan to move your retirement funds.
The source of funds is different in a rollover and transfer
While rollovers allow you to move funds between two different kinds of retirement accounts, transfers involve bringing money from one retirement account to a "like kind" account at a new financial institution. If, for example, you have a 401(k) account that you'd like to move into an IRA, you would have to request a rollover.
But if you own a
Transfers have fewer limitations than rollovers
Transferring money between two different IRA accounts is a fairly simple process, and there are no restrictions on the number of such transactions you can perform in a given period of time. The "one-per-year" rule only allows a single IRA rollover in any 12-month period. However, there are no frequency limitations when you roll over funds from a workplace retirement plan.
Unlike transfers, rollovers are reported to the IRS
Transfers don't have to be reported to the IRS, but rollovers do. The IRA provider receiving the rollover funds has to fill out IRS Form 5498, and the administrator for the account that's paying the funds reports the amount on IRS Form 1099-R.
Rollovers may have tax implications
Because transfers involve two accounts of the same type (e.g. both are traditional IRAs), you don't have to pay tax on the amount you move. You won't incur taxes on an IRA rollover either, if you bring funds from a
But you do have to pay income tax on any pre-tax retirement account money that you move into a Roth IRA, a process known as a Roth IRA conversion. You should consult a financial advisor or tax attorney if you intend to recharacterize your assets in this way, so you're prepared for the potential implications.
IRA rollover vs. IRA transfer at a glance
Moving funds between different types of retirement accounts (e.g., traditional 401(k) to traditional IRA)
Moving funds between "like kind" retirement accounts (e.g., traditional IRA to traditional IRA)
Direct vs. indirect
Funds may be sent directly to new account administrator (direct rollover) or to you first (indirect rollover)
Funds are always sent directly to new IRA
Taxes incurred only if you move pre-tax funds into a Roth IRA (i.e. a Roth IRA conversion)
No tax incurred
One rollover per 12-month period (employer plans exempt)
Unlimited number of transfers
Developing a retirement plan that works for you
Regularly reviewing your investment strategy is an important element of any retirement plan. A
They can help you determine whether consolidating your assets through an IRA-to-IRA transfer or rollover makes sense, including the possibility of moving your pre-tax funds to a Roth account when appropriate. They'll ensure any move you make takes tax implications, payoffs and tradeoffs into account.