IRA transfers: Rules to know, & how they work

You've thought ahead and opened an individual retirement account (IRA) to start funding your retirement savings. But now you might want that money in an IRA at a different institution—one that offers better investment options or is in the same place as your financial advisor. An IRA transfer can help.

With a transfer, you can move an existing IRA to a new IRA somewhere else without incurring any tax liability. Understanding how this works and important IRA account transfer rules can help you decide whether it's a good strategy for you.

An IRA transfer is simply the act of transferring an IRA from one financial institution or investment firm into an IRA at another institution.

For example, suppose you have an IRA at your bank but want to move it so you can work with a financial advisor at a different firm. An IRA transfer would move the account from the bank to that advisor's institution.

To complete an IRA transfer, you'll need to open an IRA at the receiving institution if you don't already have one. This normally can be done at the same time you initiate the transfer. In some cases, your new institution may be able to hold the investments in your old IRA. This is called an "in-kind" transfer. If not, you may be required to liquidate your investments and complete the transfer with cash.

The terms transfer and rollover are often used interchangeably. However, they're not exactly the same. Transfers and rollovers do serve very similar purposes—both may allow you to move money without incurring any tax obligations or penalties—but they are different.

An IRA transfer moves an IRA from one institution to another, but a rollover may involve moving money from an IRA or different type of account to another IRA or account. For example, moving your retirement savings out of an old 401(k) or pension and into an IRA is a rollover. This can be done whether each account is at the same or different financial institutions. Another significant difference between a transfer and rollover is that you may be limited to one rollover per 12-month period in certain cases, while transfers are generally unlimited.

There are a few different ways to move money from one retirement account to another. In each case, the process and tax implications are different, so it's important to think carefully about which option you want to pursue—and to be specific when communicating with each financial institution.

You may need to move money out of your employer-sponsored retirement plan and into an IRA if you retire or change jobs. This provides you with more flexibility, greater investment options and often saves money by eliminating plan expenses that sometimes get passed on to plan participants.

This type of rollover can either be completed as a direct or indirect rollover:

• With a direct rollover, the money is sent directly from your 401(k) to the IRA.
• In an indirect rollover, you receive the funds and must deposit them into the IRA within 60 days or it will be deemed a taxable distribution and potentially subject to an early distribution penalty In addition, the employer generally withholds 20% for taxes. You are only allowed one indirect rollover per 12-month period.

Although you may have a reason for doing an indirect rollover, direct rollovers are generally simpler and less risky to complete.

When moving from one IRA to another of the same kind—such as a traditional IRA to a traditional IRA, or a Roth IRA to another Roth IRA—you may be completing a transfer. These are also referred to as trustee-to-trustee transfers. There is no limit to the number of transfers you can complete within any given timeframe, and there are no tax implications for doing so.

Moving assets from one IRA to another can also take the form of a rollover. This occurs when the current trustee gives you a check in your name, which you then deposit into your own account. As mentioned earlier, you can avoid incurring any tax by depositing the full amount into another IRA (or even back into the original IRA) within 60 days. No withholding is required with IRA distributions, but you are still allowed only one such rollover during any 12-month period.

If you move money from a traditional tax-deferred IRA to a Roth IRA, you are completing a specific type of rollover called a Roth conversion. This can be a smart strategic move, but make sure you carefully consider the pros and cons.

You'll owe income tax on the amount you roll over, but you won't incur a penalty regardless of your age. However, if you have the taxes withheld from the conversion, you will incur a 10% early withdrawal penalty on that portion unless you are at least age 59½. If it's a qualified distribution (typically when the dollars are withdrawn after five years and you are over 59½), the withdrawal will be tax- and penalty-free. The main benefit of doing a Roth conversion is that once it's inside the Roth IRA, your money and any additional growth can then be withdrawn completely tax-free in retirement. But keep in mind that it doesn't work the other way: Money in a Roth IRA can't be moved to a traditional IRA.

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Trustee-to-trustee transfers from one IRA to another are bound by very few rules. Just make sure you understand the difference between transfers and rollovers and know which one you are doing before making any moves.

• You can transfer your entire balance or split it between the two accounts. You don't have to close one IRA to move some of your money into another.
• There are no limits on the number of transfers you can complete within any timeframe. You can do it as many times as you'd like.
• Transfers are not taxable transactions, and you don't need to report them on your tax return.

IRA transfers are an easy way for you to move money from one IRA to another without incurring taxes. You may want to do this if you think you'll get better investment options, customer service or advice at a different institution than the one you are currently using. Although there's no limit to the number of transfers you can complete, and there are no tax consequences, you still want to be sure you understand the process and its rules before you move your money.

To ensure you are making moves that provide you with the most benefit, talk with a Thrivent financial advisor, who has experience in maximizing retirement savings strategies.