Today we’ll cover the topic of IRA transfers, along with their benefits and drawbacks. Not every kind of transfer is taxable, which is why it’s all the more important to learn about the advantages and disadvantages of your main options.
Option 1: Funding Your Account with a Direct Transfer
Direct transfers involve moving IRA assets directly from one custodian to another without taking receipt of the funds. In other words this isn’t seen as pulling your money out and taking possession of it, which could potentially become a taxable event.
This option offers two major benefits. In reference to what I just mentioned, transfers aren’t reported to the IRS as a distribution (the account holder taking ownership), allowing you to avoid a tax penalty. It also allows you to continue to profit from tax-deferred earnings. Basically you’re just moving your IRA from its old custodian to American IRA.
Option 2: Funding Your Account with a Direct Rollover from a 401(k)
Funding your account with a direct rollover from a 401(k) is the second option on the list, and by definition it’s a tax-free transfer of cash or other assets from one retirement plan to another. So in other words, if you already have a 401(k) retirement account that you’d like to convert to an IRA, this may be the ideal choice (depending on the circumstances).
Like transfers, a direct rollover allows you to continue your tax-deferred earnings, and you won’t have to pay any taxes as a result of the rollover process itself.
Option 3: Funding Your Account with an Indirect Rollover
Finally, you can also fund your account with an indirect rollover. With an indirect rollover, you’ll take receipt of the IRA or 401(k) assets for up to 60 days before reinvesting them in a new retirement plan. So let’s start out by imagining you have an old IRA or a 401(k). This type of rollover would see you actually taking ownership of the funds as soon as you withdraw them, but as long as they’re deposited into a new IRA or 401(k) within 60 days you won’t be taxed.
Let’s dig a little deeper:
- IRAs can be rolled over and withholding requirements from the current provider can be waived so 100% of the funds can go to American IRA for investment purposes
- An indirect rollover with a 401(k) plan requires the current custodian to hold 20% of the funds from the account; therefore, it is advisable to use a direct rollover so that 100% of your funds are transferred
- You will incur taxes if the funds aren’t fully deposited within the 60-day timeframe