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IRA Transfer and Rollover Rules

IRA Transfer and Rollover Rules

IRAs are very flexible retirement plans, far more than defined contribution plans, such as a 401(k). An IRA owner can transfer funds directly from one IRA to another at anytime without tax or penalty. Furthermore, one can take an IRA distribution anytime without restriction, subject to income tax and a 10% early distribution penalty (if applicable), but nonetheless still have the flexibility to do so. On the flip side, one will generally need a plan triggering event, such as reaching the age of 59 1/2 or termination of employment, to gain access to 401(k) funds for purposes of rollover of distribution.

This follow will explain the IRA transfer and rollover rules, the difference between the two, and when you can execute them.

IRA Transfer Rules

One can transfer funds (cash) or assets (such as stocks or real estate), from one IRA to another IRA at anytime without limitations.  IRA-to-IRA transfers are tax free and can be done anytime. An IRA transfer can be direct or indirect.

A direct transfer is between IRA custodians (financial institutions). For example, moving your IRA at Schwab to an IRA at Fidelity. A direct transfer can be done as many times as you wish during the year with no limitation.

An indirect transfer occurs when the IRA funds are first sent to the IRA owner before re-contributing them to a different IRA within 60 days. During the 60-day period, the IRA owner is free to use the funds for any purpose without limitation. However, if the IRA owner fails to return the funds within that time period, the portion of the IRA cash or assets not returned would be subject to income tax and a 10% early withdrawal penalty if applicable. If the IRA owner withdrew cash he or she must return cash and not an in-kind asset. Indirect transfers can only be done once every 12 months.

IRA Rollover Rules

To permit tax-free transfers of retirement savings from one type of investment to another, as well as to increase the portability of qualified plan rights for employees moving from one job to another, Congress included a complicated web of rollover provisions in ERISA. These provisions cover transfers from one IRA to another, transfers from qualified pension, profit-sharing, stock bonus, and annuity plans to IRAs, and transfers from IRAs to qualified plans. In general, a rollover of retirement funds to an IRA is tax free.  Rollovers can either be direct or indirect.  A direct rollover can be done without limit, whereas an indirect rollover can only be done once every 12 months

The IRA rollover rules are essentially the same as the transfer rules. The main difference between a transfer and rollover is that an IRA transfer is solely between IRAs, whereas a rollover is between and an IRA and another retirement plan, such as a 401(k). Note: a Roth IRA cannot be rolled into a 401(k) plan.

When one wishes to rollover funds from a 401(k) plan or other defined contribution plan to an IRA, there are plan restrictions that must be respected. In general, you need a triggering event to roll funds out of a 401(k) plan, which typically consists of one of the following: you are over the age of 59 1/2, you leave your job, or the company terminates the plan. If funds are rolled directly from a 401(k) plan to an IRA, there is no tax or penalty. Furthermore, there may be a 20% withholding tax on 401(k) funds that are being indirectly rolled over.

Self-Directing Your IRA

Whether you are rolling over a former employer 401(k) plan, or transferring IRA funds from a different custodian, the process if the same when you wish to self-direct your retirement funds. Obviously, you need to first decide on a custodian that allows for alternative investments, such as IRA Financial. Once you choose a custodian, you can then follow the instructions discussed here to get your new Self-Directed IRA funded.

Remember, you cannot invest in alternatives, such as real estate and precious metals, without the proper custodian. You cannot simply go to your bank and expect to make any investment you wish! Due your research before choosing a custodian. Make sure they allow the investments you wish to make.

IRA Transfer and Rollover Rules – Conclusion

The IRA transfer and IRA rollover are basically one-in-the-same. The end result is moving funds from one retirement plan to another. If you are eligible to move funds, you may do so directly without much help, or indirectly, if you wish to access those funds for a small period of time.

There are two main reasons for moving funds. First, you separate from your job and wish to move 401(k) funds out of a former employer plan. A Rollover IRA is probably your best choice. Secondly, you may want to make different investments than what your current provider offers. This is where self-direction comes into play.

So long as you follow these basic guidelines, most retirement investors will have the ability to move his or her funds wherever they wish and make the investments they want.

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