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Here’s What You Need to Know about IRA Rollovers and Transfers

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Key takeaways

  • An IRA rollover or IRA transfer occurs when money is moved from one IRA to another.
  • The easiest way to move money between two IRAs is through a “direct rollover”, also known as a trustee-to-trustee transfer.
  • Contribution and income limits don’t apply to an IRA rollover or transfer, which is one reason some people use them to contribute to a Roth even if they make more than the IRS’s income limits. This kind of transfer is known as a “Backdoor Roth” conversion.

Saving for retirement is good. Keeping active and ongoing tabs on your retirement funds, which are all in the same place? Even better.

IRA rollovers allow you to move funds from an old retirement account into a rollover IRA, which can help you consolidate your nest egg and keep your investments growing. You may have already heard about 401(k)-to-IRA rollovers, but IRA-to-IRA transfers are also an important and often-overlooked financial option, allowing savers to change their IRAs to access different investment options. perform Roth IRA conversions, incorporate funds from inherited accounts, and more.

However, IRA transfers of all types, including IRA-to-IRA rollovers, are governed by some important rules, and understanding them can help you avoid hefty tax penalties and headaches in general.

Here’s the scoop.

People choose to open rollover IRAs for a number of reasons. You might find yourself in need of a new place for your retirement funds to live while changing jobs, for instance. Maybe you’re simply moving to a different IRA provider and want to have all of your savings under one roof.

Before we get too deep in the weeds, if you’re wondering about the difference between an IRA rollover vs a transfer — there really isn’t one. Both terms mean moving money from an old retirement account to a new one, though some people reserve “rollover” for instances where the two accounts are different types (for instance, from a 401(k) to an IRA). Generally speaking, though, people often refer to even 401(k)-to-401(k) or IRA-to-IRA transfers as “rollovers,” so you don’t have to think about it too hard.

But when, exactly, do you need to initiate this kind of transfer? Let’s take a closer look.

When to Roll Over an Old 401(k)

If you’re leaving a job, chances are you have some money saved in a 401(k) — a type of employer-sponsored retirement account that’s funded with contributions directly from your paycheck.

But once you clock out for the last time, those funds will simply sit in that account, perhaps accruing fees and certainly not under your direct supervision. In fact, if you’ve jumped from job to job over the course of your career, as so many of us do these days, you may have multiple old 401(k)s sitting around. Too often, out of sight means out of mind… and it’s easy to lose track of our hard-earned assets.

Opening a rollover IRA allows you to consolidate your retirement funds into one account, and more actively monitor your investments in the future.

But there are plenty of good reasons to perform an IRA-to-IRA transfer, too.

When to Roll Over an Existing IRA

Even if you already have an IRA, you may want to transfer into a new one.

You might simply want to move your funds to a new IRA provider. One reason to do that could be to take advantage of different investment options or fees, since IRA providers can vary on these factors. You might inherit an IRA from your spouse and want to incorporate that money into your existing account. You might also want to perform an IRA conversion, moving the money from a traditional (pre-tax) IRA to a Roth (post-tax) account.

One of the biggest benefits of an IRA transfer is that they aren’t subject to the same annual limits as regular contributions. If you have an existing IRA and want to add money to it, the IRS says you can only put in up to $6,000 per year (or $7,000 if you’re 50 or older). But when performing a rollover, you can transfer as much as you want.

This makes an IRA transfer a great way to move a larger amount of money into a new IRA, or to establish a well-funded Roth.

Note that you’ll be liable to pay taxes if you’re moving pre-tax contributions from a traditional IRA to a Roth, where only after-tax contributions are allowed.

There are also some other important rules to keep in mind to ensure you don’t end up paying additional IRS penalty fees.

There are two main ways to roll over an IRA.

  • You can initiate a direct rollover, or a “trustee-to-trustee” transfer, which means the institution holding your existing retirement funds transfers the money directly to your new IRA provider. You can also initiate a direct transfer between two accounts at the same brokerage or bank. In some cases, the administrator of your old account may cut you a physical check to be deposited in the new account, but because the check will be made out to your IRA, and not you as an individual, taxes won’t be withheld from the total. A direct transfer or rollover is the easiest way to roll over an IRA.
  • You can also do a manual, or indirect, rollover, which means you’ll take the money from your old retirement account as a distribution and then deposit it into your new IRA by hand. However, this option comes with some important caveats.

Indirect Rollovers and the 60-Day Rule

If you elect to do an indirect rollover, you must redeposit the full amount of your old retirement balance into the new account within 60 days. Otherwise, the withdrawal will be seen as a distribution, which means it’ll be taxed like ordinary income. You’ll also be subject to the additional 10% penalty if you’re under the age of 59.5.

But here’s the tricky part: in most cases, the trustee of your old account is required by federal law to withhold taxes from your distribution. This means you’ll get a check that’s at least 10%, and up to 20%, lower than the balance you had in your old retirement account… but you’re still responsible for re-depositing the full amount in order to avoid income taxation and early distribution penalties. Which is to say, you might have to make up the difference out of your own pocket.

Long story short: go with direct IRA transfers whenever possible!

Rollover vs. Traditional IRA

So what’s the difference between a rollover IRA and a traditional IRA? It’s kind of a trick question… because usually there isn’t one!

At the majority of IRA providers, a rollover IRA is simply a traditional IRA into which funds from another retirement account are transferred. Because most people have pre-tax, traditional 401(k)s, rollover IRAs are also traditional so they can receive those pre-tax funds.

The main difference between a rollover IRA and other types is that you can roll over as much money as you’d like into the new account, as opposed to being limited by the yearly contribution minimum. However, you’re only allowed a single rollover from one IRA to another in any given 12-month period, though this rule excludes trustee-to-trustee transfers and Roth IRA conversions.

Roth IRA Conversions

One of the most common reasons folks do IRA transfers is to initiate a Roth IRA conversion, which allows you to move money from a traditional IRA to a Roth.

However, doing so can trigger a significant tax bill, since the money in a traditional IRA is usually contributed before taxes. Only after-tax dollars can go into a Roth IRA — where, importantly, they continue to grow and can later be withdrawn tax-free.

Roth IRA conversions are also sometimes called “backdoor Roths,” since they allow those who surpass the income limits the IRS has set on who’s eligible to contribute to a Roth account. If you’re considering this kind of rollover IRA, we recommend talking to a fiduciary or tax professional.

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