- Transfers and rollovers are used to move funds from one retirement account to another. While they have similar functions, they’re treated differently by the IRS.
- A rollover is the moving of retirement funds between two different types of retirement accounts. A transfer is the moving of retirement funds between the same type of retirement account.
- There are two types of rollovers: direct and indirect. In a direct rollover, funds are moved directly into your new retirement plan. In an indirect rollover, your funds are sent to you first, and it’s your responsibility to deposit the full amount into your new retirement plan within 60 days.
- Both transfers and rollovers are not taxable events. However, rollovers must be reported to the IRS, while transfers do not need to be reported.
- You can do an unlimited number of transfers and direct rollovers per year. You can only do one indirect transfer per year.
- Transfers are initiated by your plan custodian, and are generally slower since you move on their timeline. Rollovers are initiated by you, the account owner, and are generally faster than transfers.
There are three different ways to fund a retirement account. Contributions, transfers, and rollovers. While transfers and rollovers sound a lot like the same thing, the IRS classifies them as two different events, and there are separate rules and regulations around them.
This guide will outline the main differences between a rollover and a transfer and how to pick the right vehicle for moving your retirement funds from one plan to another.
What is the main difference between a rollover and transfer?
Rollovers and transfers both involve moving the funds from one retirement account to another.
Before we dive in deeper into rollovers and transfers, here’s a quick way to understand the difference between rollovers and transfers:
- A rollover is the moving of retirement funds between two different types of retirement accounts. For example: A 401k rollover into an IRA or vice versa.
- A transfer is the moving of retirement funds between the same type of retirement account. For example: A transfer between one 401k plan to another 401k plan.
What is a transfer?
Transfers are used to move funds from one retirement plan to another retirement plan of the same type, and they’re much simpler to execute than a rollover.
For example, the movement of funds between a 401k to another 401k plan would be done through a transfer and not a rollover. If you move funds from one IRA to another, that would also be done through a transfer.
In a transfer, the only thing that changes is the trustee of the account. For example, if you have an IRA and want to move your account with another financial institution, the IRA would be moved through a trustee transfer from your old firm to the new firm. It’s a direct movement of funds, and the account holder never touches the money.
As a result, transfers do not need to be reported to the IRS, and there’s no limit on how many transfers you can make in a given year, or how much you can transfer.
What is a rollover?
Rollovers are used to move funds from one type of retirement to another type of retirement plan.
For example, the movement of funds between a 401k and an IRA would be done through a rollover and not a transfer.
Unlike transfers, rollovers must be reported to the IRS. Rollovers are reported through Form 1099-R. Depending on your current and new plan providers, they may take care of the form submissions for you.
There are two different types of rollovers: One where the money gets moved directly from one account to another (direct), and one where the money is sent to you first (indirect).
A direct rollover works the same way as a transfer.
The money gets sent directly from your old plan provider to your new plan provider. The account holder never touches the money. The full amount of moving funds gets rolled over into the new plan, and you don’t need to do anything as the account holder.
No taxes are withheld or owed during a direct rollover because no distributions are being taken by the account holder. Because it’s a just a direct movement between plan providers, there is no limit on how many direct rollovers you can do each year.
However, even though a direct rollover is pretty much the same as a transfer, you’re still required to report the movement of funds to the IRS.
Indirect rollover (60-day rollover)
Indirect rollovers are a little more complicating than direct rollovers.
In an indirect rollover, your old plan provider will send the funds to you, instead of sending it directly to the new plan provider. As the account holder, you’re then responsible for getting the funds moved into your new retirement plan.
- In a direct rollover, to initiate the movement of funds, your old plan provider writes a check to your new plan provider.
- In an indirect rollover, your old plan provider writes a check to you personally.
Once you receive the funds, you’re given 60 days to deposit the money into your new retirement account. If you fail to deposit the money before 60 days, you’ll have to pay penalties and taxes. For this reason, indirect rollovers are also referred to as 60-day rollovers.
The money is technically yours for the 60 days and you’re allowed to use it however you want, as long as you can deposit the full amount into the new retirement plan within the 60 day period you’re given.
Failure to deposit the full amount into your new retirement plan will be treated as an early distribution from your retirement account. The IRS will charge you income tax on the amount not deposited, plus a 10% fee.
Only one indirect rollover is allowed per year.
When to choose an indirect rollover vs a direct rollover
In most cases, you should always choose to do a direct rollover. It prevents you, the account holder, from being at risk of getting hit with penalties and fees.
The only reason why you would want to consider an indirect rollover is if you are in urgent need of the money. Since you’re allowed to use the funds however you wish for 60 days, as long as you pay it back, it can be a “last resort” option to get access to your entire retirement funds without a penalty.
Should you choose to do a rollover or a transfer?
Whether you can do a transfer or a rollover mainly depends if the account you’re moving from and the account you’re moving to are different, or the same.
For example, moving from one IRA to another IRA is eligible for a transfer. Moving from one 401k to another 401k is also eligible for a transfer.
If you’re moving funds from one account type to a different type, then you’ll have to do a rollover. For example, moving from a 401k to an IRA would be done through a rollover and is not eligible for a transfer.
Generally, transfers are slower than rollovers. With a rollover, you’re the one initiating the movement of your funds. With a transfer, your plan custodian is the one who initiates the movement of your funds, meaning it gets moved on their timeline.
If you need to move the money fast, it could be faster to do a rollover, even if you’re eligible for a transfer. Both a rollover and transfer are not taxable events. The only difference is that you need to report rollovers to the IRS, while transfers do not need to be reported.
Do you need access to the funds?
Lastly, if you need access to your retirement funds for an emergency payment, doing an indirect rollover could be a penalty-free way to get access to the funds in your account. You just need to remember to deposit the full amount into your retirement plan within 60 days.
Reasons to move funds from one retirement account to another
You might be wondering, why do people move funds from one retirement account to another.
There are many reasons why you might want to move accounts entirely, or just move from one plan provider to another.
- If you end your employment with your employer and want to move the funds into a new 401k with your new employer.
- If you end your employment with your employer and want to move the funds into an IRA, instead.
- If another plan provider provides more perks, better investment options, or lower administration fees.
- If you open another retirement account with better tax-advantages, like a solo 401k.
- You need quick access to your funds, which you can get by doing an indirect rollover.
- You want to take advantage of the mega backdoor Roth strategy.
Examples of transfers
- Transfer funds from an IRA to another IRA account.
- Transfer funds from a 401k plan to a solo 401k plan.
- Transfer funds from a Roth IRA to another Roth IRA.
Examples of rollovers
- Rollover funds from an IRA to a 401k.
- Rollover funds from a SEP IRA to a solo 401k.
- Rollover funds from a 457 plan to an IRA.
- Rollover funds from 403b to a solo 401k.
Do I need to report transfers and rollovers to the IRS?
Transfers do not need to be reported to the IRS. Both direct and indirect rollovers need to be reported to the IRS.
Do I need to pay taxes on transfers and rollovers?
No, transfer and rollovers are not taxable events. Transfers and direct rollovers are trustee-to-trustee. The money is never touched by the account holder so it is not a taxable event. Indirect rollovers are also not taxable events, but you could owe taxes and penalties if you don’t deposit the money within 60 days.
How many transfers and rollovers can I do per year?
You can do an unlimited number of transfers and direct rollovers per year. You can only do one indirect rollover per year.
Why can I only do one indirect rollover per year?
You can only do one indirect rollover per year because you’re technically given a 60 day period in which you can do whatever you want with the funds, as long as you deposit the full amount within the given time period.
Is there a limit to how much I can rollover or transfer?
There is no dollar amount limit to how much you can transfer or rollover.