Sometimes it’s annoying when people dwell on semantics. Other times it’s important to understand the differences between certain words or terms. For instance, take the words “transfers” and “rollovers” as they pertain to retirement accounts. You often hear them used interchangeably, but they have distinctly different meanings.
These differences matter a great deal to the IRS, and if you do not understand them, it could have a substantial impact on your taxes. If you are trying to move your current retirement savings into a Self-Directed IRA and are unsure of how to proceed, here are the details:
Transfers are fairly simple
Transfers are the basic method of moving your Self-Directed IRA from one firm to another. The funds move directly from one IRA to another, and the IRA owner never sees the money. Transfers are not reported to the IRS, and there are no limits on the number of times you can transfer your account.
When transferring Self-Directed IRAs, however, your account must be going into the same type of account. For example, if you are moving a Traditional IRA into a Self-Directed IRA, it cannot be a Self-Directed Roth IRA. Remember, \Traditional IRA transfers into another Traditional IRA and Roth into Roth.
There are two types of rollovers
Direct rollover: When someone moves funds from a qualified retirement plan other than an IRA—their employer’s 401(k), for instance—into a Traditional IRA, the funds are sent directly from one provider to another. As with a transfer, you will not see the money until it shows up in your new account. The difference from a transfer is that the IRS is notified of the transaction. But not to worry, there is no tax due on the rollover funds since you are “rolling” them into another retirement account.
Indirect rollover: This is the type of rollover that has the potential to cause trouble. Also known as a 60-day rollover, you get to take possession of your money personally before depositing it into an IRA within a 60-day window. In other words, you take the money, deposit it into your checking account, and then write a check for the same amount and add it to your Self-Directed IRA.
The trouble comes if you fail to re-deposit the money in the 60-day time frame and the IRS taxes the entire amount. Also, the IRS allows only one indirect rollover within 12 months regardless of how many accounts you have.
Transferring your retirement account is a low-hassle process
Make sure your old account is compatible with the new one, and the entire process will be a breeze. As mentioned above, you may only transfer a Traditional IRA into a new Traditional IRA account or a Roth IRA into another Roth. The firm into which you are transferring funds can provide you with the form to fill out and send to your current IRA provider. The funds will go directly from your current to your new Self-Directed IRA, and you can do as many as you want in one year.
One small caveat: You must rely on your old custodian to transfer the money on their timeline, so it can be a slower process.
Rollovers are perfect for moving a 401(k) from a former employer
Direct rollovers are ideal for removing funds from your company’s retirement plan and depositing it into your IRA. It’s quick and simple. All you need to do is open an IRA account, which can often be done online. Keep in mind; a Self-Directed IRA offers you many more investment options for your retirement funds.
Better yet, contact a professional
If you own a Self-Directed IRA or are looking to open one, it’s important to have an expert on IRA transactions on your side before you start the process of a transfer or rollover. Any mistakes could prove costly—the IRS can assess taxes and penalties—and you could put your entire IRA at risk.
American IRA, LLC specializes in serving the needs of owners of Self-Directed IRAs and other retirement accounts, and we will help to ensure that your transfers and transactions are executed properly and promptly, in compliance with IRS regulations and tax law.