IRA Transfers and Rollovers: The Differences and How They Work

There are three ways you can fund your retirement account. Of course, you can always make a cash contribution to the account if that contribution falls within annual limits. But if you own an existing retirement plan, IRA transfers and rollovers allow you to move funds from one plan into another, and these are the most popular ways to fund your new self-directed IRA.

Sometimes these terms are used interchangeably. However, the Internal Revenue Service (IRS) has defined critical differences between IRA transfers and rollovers that are important to understand before undertaking one or the other. This article explains the basic rules and requirements for each.

IRA Transfers and Rollovers

When performed correctly, a transfer or a rollover is a non-taxable event. If performed incorrectly, you may owe tax and early withdrawal penalties. So, understanding the difference between IRA transfers and rollovers and how each transaction works is essential to maintain the tax-sheltered status of your retirement savings.

What’s the difference between a transfer and a rollover?

These transactions are used for different reasons, and your reason determines whether you’ll perform a transfer or a rollover.

• • Transfers allow the account holder to transfer a retirement account from one custodian to another while maintaining the same tax treatment of the account, like moving your IRA directly from one institution to another institution or transferring your SIMPLE IRA to a traditional IRA (both being pre-tax accounts).

• • Rollovers involve different plan types, like moving an old workplace 401(k), 403(b) or 457(b) into a traditional IRA or Roth IRA.

Note: SIMPLE IRAs can receive transfers from traditional and SEP IRAs as well as rollovers from employer plans provided you follow the rules (covered in the SIMPLE IRA section below) for doing so.

IRA Transfers

A transfer is the easiest way to move your IRA from one custodian to another. This is often called a direct transfer since you simply transfer your existing funds into the same plan type with the new custodian. Or you can transfer funds from a traditional IRA housed by a bank or other financial institution into a self-directed traditional IRA plan administrated by a self-directed IRA service provider like Advanta IRA.

Rules for IRA Transfers

• • The IRA owner does not take receipt of the funds; the transfer occurs between the current and new plan custodian.

• • Taxation and penalties don’t come into play since the funds technically never leave the protection of the IRA (and because the account owner doesn’t take possession of the funds).

• • There is no limitation on the number of times plan owners can perform IRA-to-IRA transfers within a 12-month period.

• • Transfers can also involve assets, in which case the investment is moved and retitled into the name of the new account.

IRA Rollovers

If you want to move funds from one plan type to a different plan type, you’ll perform a rollover. Rollovers are sometimes called rollover contributions because by depositing the funds into your new account, you’re making a contribution.

For example, if you want to move your old 401(k) funds in a previous employer’s plan into a conventional IRA or into a self-directed IRA, you will perform a rollover. The specific transaction of moving funds from a different plan into an IRA is often called a rollover IRA.

There Are Two Types of Rollovers—Direct and Indirect

And there are rules for each that you must follow depending on which transaction you choose.

Direct rollovers are transactions that move funds from one custodian to another, without the account owner taking possession of the funds being moved.

• • Direct rollovers involve a custodian-to-custodian action and are not considered distributions. This means these transactions are not subject to tax or penalty.

• • In almost all cases, direct rollovers involve moving funds from an employer-sponsored plan (like a 401(k), 403(b), 457 or Thrift Savings Plan) to a traditional or Roth IRA.

• • There is no limitation on how many times an account owner can do a direct rollover in a year.

• • Tax withholding by employers does not apply when a direct, custodian-to-custodian rollover is performed.

• • Direct rollovers can also include the movement of assets other than cash, in which case the asset is re-titled from the name of the employer’s plan int the nae of the new IRA.

Indirect rollovers involve plan owners taking receipt of the funds from one account and depositing them into a new account.

• • Indirect rollovers involve the account owner receiving the funds to be moved, which is considered a taxable distribution. If the funds are deposited into the new account within 60 days from the date they were withdrawn, you avoid taxation.

• • Indirect rollover rules require employers to withhold 10-20 percent of the employee’s plan funds (from a 401(k), 403(b), 457 and a Thrift Savings Plan) when moving them into an individual plan (i.e. IRA).

• • You can only perform one indirect rollover every 12 months, even if you own more than one plan.

NOTE: The IRS 1-rollover-per-year rule does not apply to the following plans:

• • rollovers from traditional IRAs to Roth IRAs (conversions)
  • trustee-to-trustee transfers to another IRA
  • IRA-to-plan rollovers
  • plan-to-IRA rollovers
  • plan-to-plan rollovers

60-Day Rollover Rules for Indirect Rollovers

• • Funds must be deposited into the new account within 60 days from withdrawal.

• • If the plan owner is less than 59 ½ years old, a 10 percent early withdrawal penalty also applies if the funds are not deposited into the new account within the 60-day timeframe.

SIMPLE IRA Transfer and Rollover Rules

While you must adhere to the basic rules for transfers and rollovers outlined above, there are additional IRS rules for transfers and rollovers for SIMPLE IRAs that are a bit different from typical rules. Keep in mind that SIMPLE IRAs are a type of employer plan that allows small business owners and self-employed individuals the ability to save for retirement.

Moving funds from SIMPLE IRAs

• • You can make tax-free transfers into any other IRA (except a Roth IRA) and rollovers to employer-sponsored plans like 401(k)s, 401(b)s, and 457(b)s as long as this transaction occurs after a 2-year timeframe that starts on the first day you made a contribution to your employer SIMPLE IRA.

• • If you want to move funds from your SIMPLE IRA inside of that 2-year timeframe, you can only move those funds into another SIMPLE IRA.

• • Rollovers into Roth IRAs are taxable, since you’re moving from a pre-tax account into an account that accepts post-tax contributions.

Moving funds into SIMPLE IRAs

A law was passed in 2015 allowing SIMPLE IRAs to accept funds from accounts other than SIMPLE IRAs. Prior to 2015, SIMPLE IRAs could only accept funds from other SIMPLE IRAs.

For rollover and transfer transactions made after the law was enacted on December 18, 2015:

• • SIMPLE plans can receive funds from traditional IRAs, SEP IRAs, and employer-sponsored plans such as 401(k)s, 401(b)s, and 457(b)s.

• • Rollovers from other plans can only be made after the second year of the day that a plan owner first contributed to their employer’s SIMPLE IRA.

• • You cannot rollover (post-tax) Roth IRA funds into a (pre-tax) SIMPLE IRA.

• • You cannot rollover designated Roth portions of employer plans into SIMPLE IRAs.

• • You are limited to one indirect rollover per year when moving traditional, SEP, or SIMPLE IRA funds into a SIMPLE IRA.

IRA Tax Rules for Transfers and Rollovers

As mentioned, transfers are non-taxable events since funds are moving directly from one custodian to another. These transactions do not need to be reported on your income tax return.

Rollovers are non-taxable events if you abide by the rules outlined above and if you are moving funds from one pre-tax account into another pre-tax account.

You will owe tax if you perform a Roth conversion—moving funds from a pre-tax plan such as a traditional IRA or 401(k) into a post-tax Roth IRA or designated Roth account, you will pay tax on the amount converted.

All rollovers, taxable or not, are required to be reported on your income tax return.

HSA Transfers and Rollovers

You’re able to transfer and/or rollover funds from Archer MSAs and health savings accounts (HSAs) into other HSAs. The rules are similar to IRA transfer and rollover rules.

• • Transfers for HSAs are non-taxable events, as the funds are moved from custodian to custodian.

• • You’re able to perform as many transfers as you’d like within a 12-month period.

• • Rollovers are non-taxable provided the funds are deposited into the new account within the 60-day timeframe outlined above.

• • You can only make one rollover within a 12-month period.

HSA-to-IRA Rollovers

You cannot roll an HSA into an IRA, but you can fund your HSA with IRA dollars. IRA-to-HSA fundings are allowed once in a lifetime, and the maximum amount you can fund from the IRA to the HSA cannot exceed that year’s contribution limit for HSAs. These are complex transactions, and we urge you to confer with a tax professional or financial advisor before making this decision.

Have Questions? Advanta IRA Has Answers

Transfer and rollover rules and regulations can be somewhat confusing to navigate. But it’s important you understand how each transaction works to determine which is best for you. If you’re thinking of rolling over retirement funds into a self-directed IRA to invest in alternative assets to the stock market, an IRA rollover is an easy way to accomplish that goal. Once you fund your self-directed retirement plan, you can build retirement savings by investing in real estate, private equity, private lending, gold, and much more.

Contact Advanta IRA today if you have questions about this article or if you want to learn more about what a self-directed IRA is, how it works, and how to get started.

Additional reading about self-directed IRAs and alternative investments:

Self-Directed IRAs vs. Traditional IRAs: Which Plan Is Best for You?

Quick Guide to Self-Directed IRA Investment Options for 2023

10 FAQs about a Self-Directed IRA (SDIRA) + Alternative Investments