Difference Between a Transfer and a Rollover (SDIRA)
Opening a self-directed IRA (SDIRA) is an important step toward diversifying your retirement portfolio. It allows you to invest in alternative investments such as real estate, precious metals, private equity, and other types of assets, and it gives you complete control over how you grow your account.
Once you open your account, you’ll need funds so you can start investing in all the exciting options SDIRAs offer. The good news is that there are several methods to fund your account, including transfers, rollovers, and contributions.
Transfers and rollovers are the two most popular methods to fund an SDIRA. Each of them has specific rules and tax implications. We are here to help you learn about them so that you can confidently choose the option that is right for you.
Transfer
A transfer is simply transferring a single type of retirement account to a new financial institution. When using a transfer, the account type does not change. This is also sometimes called a trustee-to-trustee transfer.
For example, you can easily transfer your funds or assets from a traditional IRA from one institution to another institution. The account is a traditional IRA at the beginning of the transfer, and it is a traditional IRA at the end of the transfer process. This is also true for other accounts like a Roth IRA or a SIMPLE IRA. The only exception to this rule is that a SIMPLE IRA can also be transferred to a traditional IRA after it has been a SIMPLE IRA for two years.
When using a transfer, the funds in the IRA are never made payable or distributed to the account holder. This is extremely important because it means that the assets in a transfer are not taxable, and the transfer is not reported to the IRS.
Rollover
Another way to move funds into your SDIRA is a rollover. Rollovers are used to move funds from one type of account to another type of account. One example of this would be moving funds from a 401(k) to a traditional IRA. There are two types of rollovers, and they have distinct tax implications. All rollovers, however, must be reported to the IRS.
Direct Rollover: A direct rollover is a simple way to move funds from an employer’s plan to a new retirement plan or an IRA. As the name implies, this rollover option moves your funds directly from your retirement account to a new type of account at a new institution. Direct rollovers don’t require any funds to be withheld for taxes, since the funds go directly into your IRA.
Indirect Rollover: An indirect rollover requires a few more steps than a direct rollover. To initiate an indirect rollover, sometimes referred to as a 60-day rollover, the account holder requests a distribution of their retirement plan assets. For an indirect rollover, the check or wire will be made out to the account holder.
You might notice that this is different from a transfer because the account holder takes possession of the funds. Consequently, the funds are now considered a distribution. This means that the funds are now most likely taxable and may be subject to an early withdrawal penalty. Distributions from IRAs also require that 10% of the distribution be withheld, and distributions from 401(k)s, 403(b)s, and governmental 457(b)s require 20% to be withheld.
But never fear. If you deposit the funds into a new tax-advantaged account with a financial institution within 60 days of the distribution, the funds are returned to their tax-advantaged status.
The IRS provides a detailed Rollover Chart that clearly explains the types of accounts that can be rolled over and the types of accounts they can be rolled into.
Keep in Mind
There are a few other things to keep in mind about rollovers.
The IRS has a one-rollover-per-year rule when you are rolling over funds between two IRAs that are the same type. This rule applies to traditional, Roth, SEP, and SIMPLE IRAs. The rule does not apply to rollovers between account types or direct transfers.
You cannot roll over a required minimum distribution from your IRA.
Most employer plans require that you are no longer a current employee to remove funds from your retirement plan. Check with them to see if they allow in-service withdrawals to complete a direct rollover while you are a current employee.
There are a few other details about funds you cannot roll over in retirement plans explained on the IRS rollover page.
Don’t forget the 60-Day Rollover has a 60-day limit, so only make that choice if you are certain you can secure the funds in a new account in less than 60 days.
Contribution
While transfers and rollovers are the two most popular methods to fund an SDIRA, you also have the option to establish and grow your account by making yearly contributions.
Contributions must be cash and can be made via check, wire transfer, or ACH. Make sure to review the current contribution limits if you’re considering this method. The IRS updates the limits each year.
Fund Your Account
And there you have it. Funding your SDIRA is as easy as transferring or rolling over your current retirement funds or making a contribution. Don’t have an account yet? We make it easy to open an SDIRA in about 10 minutes online, and our online portal makes managing your account a breeze.
And as always, it’s a good idea to discuss any investments and changes to your accounts with a qualified financial expert.
