IRA rollovers and transfers involve the tax deferred movement of funds between different retirement accounts. Oftentimes there will be a need or desire to move funds from one retirement account to another. This will occur, for example, after leaving an employer, or when moving your IRA from one financial institution to another. If these movements of funds are conducted in accordance with IRS rules the account participant can avoid taxable events which normally occur when withdrawing funds from retirement accounts.
An IRA rollover is the movement of funds from an employer sponsored retirement plan, such as a 401K or 403B plan, to an individual retirement account (“IRA”). If done in accordance with IRS rules, the rollover will not result in a taxable event for the account participant.
In rare cases it is possible to perform a direct, trustee to trustee transfer of funds from the 401K plan to the IRA. Such transfers are typically initiated by the receiving financial institution or trustee.
In the majority of cases, however, rollovers are accomplished by having the 401K plan custodian generate a check payable to either the receiving financial institution which has custody of the receiving IRA account or directly to the 401K participant. In order to comply with IRS rules and not have the 401K plan withdrawal be treated as a taxable event, funds must be rolled over to the receiving IRA account within 60 days. This is true even in cases where the 401K plan custodian generates a check payable to the custodian of the receiving IRA account.
An IRA transfer is a movement of funds from one IRA custodian to another. These transactions can usually be executed by means of a direct, trustee to trustee transfer, typically initiated by the financial institution on the receiving end of the transfer.
Similar to how IRA rollovers are executed, a transfer can be accomplished by having the financial institution which has custody of the IRA generate a check payable directly to the receiving financial institution. A transfer executed in this manner must be completed within 60 days in order to avoid having the withdrawal deemed to be a taxable event.
Alternatively, an indirect transfer can be accomplished by having the financial institution which has custody of the IRA generate a check payable to the account holder. The account holder then has 60 days to roll the funds over to the new IRA account at the receiving financial institution or trustee. Keep in mind that oftentimes when performing such an indirect transfer, taxes will be withheld by the outgoing custodian. It is important that the full amount of the withdrawal be rolled over to the new account in order to avoid any taxable event associated with the withdrawal.