What Is the Difference Between an IRA Rollover & an IRA Transfer of Funds?

by Herb Kirchhoff

    Moving funds to or from an individual retirement account can be accomplished by means of a rollover or a transfer. While both transactions will move money from one IRA to another, there are important differences between these transaction types that can have a direct effect on your retirement funds and your taxes.

    Many people call any movement of funds from one retirement account to another a rollover, but the Internal Revenue Service makes a clear distinction between a rollover and a funds transfer. In a rollover, the money being moved is paid to you and you then deposit the funds in the other account. In a funds transfer, the custodian of the IRA account you are withdrawing from transfers the funds directly to the custodian of the IRA account you designated to receive the funds. You never see the money.

    In a rollover transaction, you have 60 days from the date you receive the funds to deposit the money in the destination IRA. If you fail to complete the transaction within the time limit, the money becomes a taxable withdrawal and you may also face the 10 percent early withdrawal penalty if you are under 59 1/2. If you are withdrawing from a personal IRA for a rollover to another IRA, there is no tax withholding. But you can do only one rollover every 12 months from a particular IRA account.

    In a direct plan-to-plan IRA transfer, the funds never leave a retirement plan. The direct transfer of funds between the two plans eliminates any worry about meeting the 60-day deadline. The transfer may be accomplished by wiring the money directly between the respective IRA custodians. The donor IRA can also accomplish the transfer by issuing a check made out to the custodian of the receiving IRA and mailing it out. With direct transfers, there is no mandatory waiting period between transactions.

    The distinction between a rollover and a direct transfer also exists when you are moving funds from an employer-sponsored retirement plan such as a 401(k) to your personal IRA. But the rollover rules in this case have one important difference from the rules for IRA-to-IRA rollovers. The employer plan’s custodian must withhold 20 percent of the rollover distribution for taxes. If you can make up the withheld 20 percent from other funds within the 60-day rollover window, the withheld money will be refunded to you when you file your taxes. There is no withholding with a transfer from an employer-sponsored plan directly to an IRA. You can do only one employer plan-to-IRA rollover every 12 months, but there’s no waiting period for direct transfers.

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    About the Author

    Herbert Kirchhoff has over 35 years experience as a newspaper and newsletter reporter, writer and editor, with 27 of those years spent on telecommunications industry policy issues. Kirchhoff has a B.A. in journalism from Rider University in New Jersey and has been published in the "Trenton (N.J.) Times" and in "Communications Daily" and State Telephone Regulation Report, Washington, D.C.

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