What Is an IRA Transfer?

IRA Transfers Explained in Less Than 5 Minutes

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An IRA transfer involves moving funds to or from an individual retirement account (IRA). IRA transfers are generally tax-free as long as you put the money into another qualified retirement account and don't take a distribution.

However, understanding the rules surrounding IRA transfers is important if you want to avoid or minimize taxes. The type of account you currently have, the type you’re moving funds to, the amount of the transfer, and the timing of the transfer may all be subject to regulations from the Internal Revenue Service (IRS).

Definition and Examples of IRA Transfers

Most retirement savings vehicles allow you to defer taxes on distributions by rolling them over to another retirement plan or IRA within 60 days. This process is known as an IRA transfer or IRA rollover when it involves an individual retirement account.

  • Alternate name: IRA rollover

The most straightforward type of retirement account transfer is from trustee to trustee, which is simply a direct transfer of an account from one financial institution to another. For example, you could move a traditional IRA to another traditional IRA, just with a different bank. While not an IRA transfer, moving an old 401(k) into a new 401(k) account is a similar situation.

Other types of transfers include:

  • Direct rollover: Moving funds from one type of retirement account to another, like a 401(k) to an IRA
  • Indirect rollover: Receiving the funds directly and reinvesting them into another qualified plan
  • Roth conversion: Converting a traditional IRA to a Roth IRA

Roth IRAs contain funds that have already been taxed. If you attempt to transfer untaxed funds that you received as a distribution from another account to a Roth IRA, they will be counted as income when you file taxes.

How Does an IRA Transfer Work?

The IRS sets the rules for eligible accounts, penalties, and more related to IRA transfers. Depending on the source of your IRA, your plan administrator or financial institution will assist with the logistics of the transfer.

If you leave your job and get a new one, you’ll have a few options to consider if you have funds in an employer-sponsored retirement plan. For example, you may be able to move the money into a 401(k) with the new employer, move it from a 401(k) into an IRA, or even take a direct payment.

Types of Retirement Account Transfers

Each transaction has its own tax consequences, so it’s important to understand each type.

Direct (trustee-to-trustee) transfers from one bank to another are not considered a withdrawal and don’t require you to pay any taxes.

A direct rollover from one plan to another, such as a 401(k) to a traditional IRA, will not incur any taxes. You must ask your plan administrator to make the payment directly to the new IRA or retirement plan.

Indirect rollovers, in which the funds are distributed straight to you, can be tricky because when you receive a check, the plan will automatically withhold the required 20% for employer-sponsored plans, or 10% for IRAs. You can still roll over the entire distribution tax-free within 60 days, but you’ll need to use other funds to make up for the amount withheld.

If you have an account balance of less than $1,000, the plan administrator will typically close your account and send you a check, minus the mandatory withholding.

If you want to move funds from a traditional IRA to a Roth IRA, this is known as a Roth conversion, and different rules apply. A Roth conversion is a taxable event, which means you’ll have to pay income taxes on the transfer amount.

There are pros and cons to each type of transfer depending on your specific circumstances and tax liability and it may be wise to first consult a financial advisor.

Limits on IRA Transfers

Many other rules apply when it comes to IRA transfers. There are limits related to the type of account(s), the timing, and the amount.

Plan Limits

The IRS permits rollovers from a variety of plan types, including a Roth IRA, traditional IRA, 401(k), 403(b), 457(b), and SEP or SIMPLE IRA if you’re self-employed. However, your retirement plan is not required to accept rollover contributions. Check with your plan provider to see what type of contributions are accepted, if any.

Timing Limits

You are only allowed to transfer funds from one IRA to another IRA once within a 12-month period. If you have more than one IRA, they are counted in the aggregate, and the IRS applies this rule to all. There are some exceptions, including Roth conversions, trustee-to-trustee transfers, plan-to-plan transfers, or any transfers that happen between two different types of accounts.

Dollar Limits

You can roll over all or part of any IRA distributions except required minimum distributions or any repayment of excess contributions and related earnings.

Key Takeaways

  • An IRA transfer (or rollover) is when you move funds from one IRA into another IRA or retirement plan.
  • IRA transfers are typically tax-free as long as you put the money into another retirement account rather than taking a distribution.
  • You must deposit the payment into another retirement plan or IRA within 60 days to avoid tax penalties.
  • Some types of IRA transfers are limited to one per 12-month period.