Comparison between IRA Transfer vs. Rollover

Jun 07, 2023 By Triston Martin

A transfer of assets from one individual retirement account (IRA) to another IRA held at a different financial company is known as an IRA transfer. Moving money into an individual retirement account (IRA) from another form of retirement plan, such as a 401(k), is referred to as a rollover. Yes, they are extremely similar, but the two have significant variations, particularly about your taxes.

What Is An IRA Transfer?

When you change your IRA account from one custodian to another, this action is called an IRA transfer. You may locate a new financial institution or brokerage firm that will hold your retirement account cheaper than the one you're using now. It's possible that you'd want additional investing possibilities than the ones offered by your present provider. Remember that a transfer entails moving assets between accounts of the same type, in this case, individual retirement accounts (IRAs), regardless of why you are making the change.

So how will it work? Moving your money from a savings account with your present bank to a savings account at a new bank is comparable to transferring your retirement account (IRA) from one location to another. You need to contact your existing provider and request a transfer from trustee to trustee. Your current IRA will then be transferred to the new service provider by your current custodian.

What Is An IRA Rollover?

When you shift money from one type of retirement plan into another, you have completed what is known as a rollover. This happens frequently when people move to other occupations. They withdraw the funds from the retirement plan provided by their company and place them in an individual retirement account (IRA), over which they have complete authority. A rollover is a process of transferring assets from one or more of the following plans into an individual retirement account (IRA):

  • 401(k)
  • 403(b) SEP I
  • RA 457(b)

Differences between IRA Transfer versus Rollover

Transferring money out of an IRA and rolling it over directly into another account are simple processes that don't have major repercussions for your taxes. You won't have to pay taxes on transaction, but you must declare the direct rollover on your federal tax returns. This is because the rollover is considered a taxable event.

The situation is much different when it comes to indirect rollovers. You have sixty days to complete an indirect rollover, as was previously specified. If you don't put the money back into your IRA within the specified time, the Internal Revenue Service will consider the money to be distributed instead. If you take the money out of your retirement account before you are 59.5 years old, you will be subject to federal income taxes and a 10% penalty for early withdrawal.

Remember that even with a direct rollover, if you roll over any money already taxed into a Roth IRA, you will be required to pay income taxes on the transaction. Another important aspect of indirect rollovers is the deductions made from taxable income. The employer-sponsored retirement plan will deduct twenty per cent of your account balance before sending you a cheque for an indirect rollover. This is done so that taxes may be paid. The caveat is that to delay taxes on your whole investment; you must come up with an additional twenty per cent of the money and put it into your retirement account (IRA). This 20% will eventually be refunded to you by the IRS.

Take, for instance, the scenario in which you use an indirect rollover to transfer $50,000 from your previous company's 401(k) plan into a standard IRA. Your plan's sponsor will issue you a cheque for $40,000 after deducting 20% for administrative costs. You will then be required to contribute to your IRA $50,000 during the next sixty days, augmenting the $40,000 with $10,000 drawn from another source.

Bottom Line

Despite their close relationship, transfers to an IRA and rollovers of IRA funds differ. You have completed a transfer when you provide your custodian with instructions to shift your assets from your existing IRA to an IRA held by a different financial institution. A rollover, in contrast, is the process of transferring retirement assets from one kind of account, such as a 401(k) or 403(b), into an individual retirement account (IRA). In addition, the IRS distinctly deals with them. Transferring money from an individual retirement account (IRA) or doing a direct rollover into a conventional IRA will not result in any additional tax liability; however, failing to carry out an indirect rollover within the allotted time frame might result in additional tax liability as well as an early withdrawal penalty.

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