Choose an account type
August 16, 2021
If you’re saving for retirement, you’ve probably heard these terms: IRA transfer or rollover IRA.
They might sound the same to you, but in the financial industry, there’s actually a very important distinction between an IRA transfer and a rollover. So, let’s define both.
Transfers are the most common way to move money from one retirement plan to another, and specifically from one IRA to another.
They’re very easy to do, and you can do unlimited amounts of transfers within any given year.
Let’s say you have a traditional IRA at Fidelity, and that IRA is a pre-taxed IRA. Let’s say you want an establish a pre-tax IRA at Nuview Trust Company.
In order to move money from the Fidelity IRA to the Nuview IRA, all you have to do is an IRA transfer.
You simply fill out the transfer paperwork with the receiving custodian.
So, wherever you’re trying to move the money to, they should have a transfer form.
You fill out that transfer request. It’s then sent to the current custodian, and they move the money via wire or via check.
The important thing about transfers is that they’re not reported to the IRS. And, you have to move them between like accounts. The term “like accounts” refers to how they’re taxed.
Traditional IRAs, SEP IRAs and simple IRAs that have been established for more than two years are all pre-tax accounts.
So, you can transfer money from those accounts to another IRA, or another custodian, without having to report it to the IRS. And you can do it as many times as you want.
But, if you want to move money from a traditional IRA to a Roth IRA – since those are taxed differently – that has to be moved through something called conversions.
We’ll talk about conversions later on.
Rollovers are a little bit different. It’s still the process of moving money from one retirement plan to another. But with rollovers, the biggest difference is that they are reported to the IRS.
They’re reported as a distribution from the money leaving the current custodian. And, they’re reported as a rollover contribution to the new custodians’ retirement accounts.
You often are forced to do rollovers when breaking down an old employer plan.
Oftentimes they’re going to force you to leave that plan. And since a 401k is not like an IRA – they’re not “like accounts” – you must distribute the money from the 401k and roll it into the IRA.
Now there are two different types of rollovers. There’s what we call a direct rollover and an indirect rollover.
The differences between the two is a direct rollover is when the sending custodian makes the check payable to the receiving custodian.
For instance, if it’s a Fidelity 401k, and you’re moving it to a Nuview IRA, the rollover check will be made payable to Nuview IRA for the benefit of your retirement account.
Now you can do direct rollovers is many times as you want.
And there’s no timeframe as to when the money has to leave the current custodian, or arrive at the new custodian.
This is different to an indirect rollover.
An indirect rollover is where the sending custodian makes the check payable to you.
When they do this, there’s really no guarantee of what you’re going to do with that money.
If you deposit that money in your own bank account, you have 60 days to roll those funds into another IRA without having to pay taxes or penalties.
So, there is a timeframe as to when the money leaves the plan and needs to be rolled over into a new plan, because the checks made payable to you.
You’re also limited on how many times you’re allowed to do this. Current law states that you’re only allowed to do an indirect rollover – or a 60-day rollover – once every 12 calendar months.
So, if you do it once you can’t do it again for another 12 calendar months.
Now with both types of rollovers, there’s going to be reporting.
The sending custodian is going to report the distribution on what’s called a 1099 form. That’s a tax form that’s going to be sent at the end of the year. That shows you distributed the money out of your 401k.
And then when the receiving custodian rolls the money in, they’re going to send another document to the IRS called a 5498 form that usually offsets the distribution.
So, a lot of people don’t want to pay taxes on their distribution. And the 5498 is what tells the IRS that you didn’t take the distribution. You just rolled it into an IRA. Those two forms often offset each other.
Let’s talk about some pros and cons between transfers and rollovers.
Remember, you can do an unlimited number of transfers. So, you can transfer a hundred different times between IRAs at different custodians, and you don’t even have to report that to the IRS.
Depending on the custodians that you’re working with too, it can often be much faster and there’s no paper involved. This means they don’t have to cut a check to do a transfer. Oftentimes they can just send the money via wire.
Check with your current custodian regarding the length of time for a transfer process to complete because it could vary based on the custodians and their banks.
Now, when it comes to rollovers, they are initiated by the sending custodian.
The sending custodian should have rollover paperwork that asks you:
And there’s going to be reporting involved through a 1099 and a 5498.
Now, be very careful that you make the distinction between a direct rollover and an indirect rollover.
With direct rollovers:
Indirect rollovers, go to you. When the money comes to you first, there’s going to be tax withholding. You’ve also got 60 days to make a decision to roll that money back into an IRA or retirement plan.
And when the money comes to you via indirect rollover, you can only do that once every 12 calendar months for all your plans.
The last thing I wanted to do is revisit conversions.
A lot of people decide that they want to take money from a traditional IRA and move it to a Roth IRA. Since those are not “like accounts” that must be done via a conversion.
When you do a traditional IRA to Roth IRA conversion, you’re deciding you want to pay taxes on the money in your traditional IRA and move it to an after-tax Roth IRA. So, there is government reporting here.
It’s similar to a rollover where you’re going to have a 1099 issued at the end of the year for the amount you decide to convert. But, it’s going to show a rollover contribution into a Roth IRA.
Now this could create a taxable event to you. However, we have a lot of education and videos on how to analyze a Roth conversion, because it might make sense to pay taxes now versus pay it later.
But, we just wanted to make that comparison between transfers, rollovers, and conversions and how they’re different.
And if you ever have any questions, make sure to reach out to us using the information below.
For more information, we go live every Wednesday with our Wednesday workshop.
Make sure to stay connected with NuView Trust by doing the following:
We go live with education almost daily.
We love to provide investors the true story of what’s possible inside of an IRA, and possibly inside of a 401k.
See you soon!