There are only three ways one can move property into a Self-Directed IRA: transfer, direct rollover and indirect rollover. This article will explain in detail the three ways one can contribute property from another retirement account into a Self-Directed IRA. For proposes of this article, we are not grouping a cash contribution to an IRA as a transfer. In general, in 2022, one can contribute up to $6,000 or $7,000 if at least age 50 to an IRA.
- A transfer occurs between two IRA accounts
- Rollovers occur from a non-IRA account (such as a 401(k) plan) to an IRA
- One may move property from one plan to another via a transfer or rollover
A transfer of cash or property occurs when assets in one IRA are moved to another IRA. A transfer can only occur between IRAs and is not subject to tax or penalty. IRA transfers are direct transfers between IRA custodians. Thus, a Self-Directed IRA transfer can be in cash or in-kind. An in-kind transfer simply means a transfer of non-cash property, such as real estate or stocks, from one IRA to another IRA. There are no limits on the number of IRA transfers that can be done during a year.
A direct rollover is when retirement funds are moved directly from a non-IRA retirement account, such as a 401(k) plan, to an IRA. For practical purposes, there is really no difference between a transfer and a direct rollover. However, the proper terminology of moving 401(k) plan or other non-IRA funds to a Self-Directed IRA is called a direct rollover.
A direct rollover from a retirement plan to a self-directed IRA is tax-free. Like IRA transfers, direct rollovers can be done an unlimited number of times. A direct rollover can consist of cash or an in-kind asset.
An indirect rollover occurs when the retirement account is rolled over to the retirement account holder first before the funds are ultimately rolled into a Self-Directed IRA. The retirement account owner would have sixty (60) days to re-contribute the funds to a new retirement plan.
An indirect rollover can only be done once every twelve months for all your IRAs. So long as the funds are coming from an IRA or qualified retirement plan, such as a 401(k), 403(b), 457(b), defined benefit plan, etc., the rollover can be done.
An indirect rollover allows the retirement account owner to gain tax- and penalty-free access to the rolled over retirement funds for a 60 day period once every twelve months. The funds rolled over to the retirement account owner must be rolled into a retirement account within 60 days or the amount of the indirect rollover would be deemed a taxable distribution, which would be subject to tax and a 10% early distribution penalty, if applicable.
The type of asset rolled over must be replaced within that 60-day period, For example, if cash is rolled over, only cash can be rolled over to a retirement account. You cannot rollover cash and then try to substitute it for a piece of property.
401(k) Plan Triggering Event Rules
In the case of an indirect rollover involving an IRA, there is no limitations on when an IRA rollover can be done. However, in the case of a 401(k) plan, the 401(k) plan rules impose certain requirements on when a plan participant can gain access to their 401(k) plan funds to engage in an indirect rollover.
In general, in order for a 401(k) plan participant to do a direct or indirect rollover, one generally needs to satisfy a plan triggering event. The three most common ones are:
- Reach the age of 59 1/2
- Separate from your job
- Plan is terminated
Hence, if a 401(k)-plan participant is not able to satisfy a plan triggering event (or possibly a hardship exception), the plan participant will likely not be eligible to engage in a rollover to a Self-Directed IRA.
In addition, any taxable indirect rollover distribution paid to you and not transferred directly to another retirement account from an employer-sponsored retirement plan is subject to a mandatory income tax withholding of 20%. The 20% withholding tax would apply even if you intended to roll it over later to another retirement plan. If you do roll it over and want to defer tax on the entire taxable portion, you’ll have to add funds from other sources equal to the amount withheld. Note – the 20% withholding tax does not apply to direct rollovers.
The most common way to transfer property to a Self-Directed IRA is by way of a transfer or direct rollover. IRA transfers and rollovers of property can be made of cash or an in-kind asset, such as real estate, without tax. However, in the case of an indirect rollover, the cash or asset received must be returned within 60 days for the rollover to be tax free. Also, an indirect rollover can only be done once every twelve months.
If you wish to move a piece of real estate from one retirement plan to another, you may do so by following the rollover and transfer rules. It’s important to keep in mind that you cannot directly contribute a piece of property you own personally to a retirement plan. You can only contribute cash to the plan.