IRA Transfers & Rollovers
There are three ways to fund a new self-directed retirement plan. You can make a cash contribution as long as that contribution doesn’t exceed the annual contribution limits for the new plan. IRA transfers and rollovers are two other ways to fund your new account.
IRA transfers and rollovers allow you to move funds or assets from an existing retirement plan into a newly opened account. The option you use depends on the type of account you have that you are moving into the new plan. When performed correctly, neither transaction carries a tax liability—moving funds this way is not a distribution. Additionally, the amount you transfer or rollover is not a contribution, so you can move a portion of or all of the funds from one plan into another.
Understanding how transfers and rollovers (direct or indirect) work and their differences is crucial. Failing to adhere to the guidelines of either transaction can result in taxation and penalties of your hard-earned retirement savings.
IRA transfers involve the same type of retirement plan moving from one firm to another. For example: moving a traditional IRA from ABC Bank to a traditional IRA at Advanta IRA. Transfers are not reported to the IRS, and they are not taxable because the assets were never made payable to you or distributed to you.
There is no limit to the number of transfers you can do between IRA custodians. Transfers are available for all types of IRA accounts (Roth, SEP and SIMPLE), as long as the transfer is completed between eligible accounts. IRC Publication 590-A goes into greater detail on what you should know.
A direct rollover is when you move assets out of an employer-sponsored plan (such as a 401(k), 403(b), 457, or pension plan) directly into a new IRA. If the employer-sponsored plan is with a past employer, you can direct those funds to be sent to the new administrator, as well. If your employer-sponsored plan is with a current employer, there may be restrictions on moving those funds to an IRA unless you are over the age of 59 ½ or have other special provisions within your 401(k) plan.
To move funds in an indirect rollover, you personally take possession of your assets and upon receipt, you place these assets into your new account with a qualified firm. The funds must be rolled over into the new account within 60 days of the original distribution to ensure the assets remain inside the tax protection of your IRA. Failure to do so may result in your being taxed on those funds and having to pay an early-distribution penalty.
The IRS only permits indirect rollovers once per 12-month period. These transactions trigger various tax implications and are typically performed in rare circumstances. Consult with the proper professionals before you make this move.
Transfer and Rollover Rules for SIMPLE IRAs
SIMPLE IRAs are employer-sponsored accounts for small business owners and self-employed individuals. The transfer and rollover rules for these plans are different than other IRA transfers and rollovers. Contributions are made with pre-tax funds, and you’ll pay taxes when you take distributions in retirement.
Rules to move funds from a SIMPLE IRA into another plan:
- You can perform a tax-free transfer of SIMPLE IRA funds into other pre-tax IRAs and employer plans (401(k)s, 401(b)s, and 457(b)s) as long as you do so two years after you made your first contribution to the SIMPLE IRA.
- You can move funds from one SIMPLE IRA into another SIMPLE IRA at any time; the two-year period does not apply.
- If you rollover SIMPLE IRA funds into a Roth IRA, you will pay tax on those funds since you’re moving them from a pre-tax plan into a plan that accepts post-tax contributions.
Rules for moving funds from other plans into SIMPLE IRAs:
- You can move funds from traditional IRAs, SEP IRAs, and employer-sponsored plans such as 401(k)s, 401(b)s, and 457(b)s into a SIMPLE IRA.
- 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.
- Rollovers from a post-tax Roth IRA into a SIMPLE IRA is prohibited, as are Roth portions of employer contributions to their employees’ SIMPLE IRAs.
- You are only allowed to perform one indirect rollover per year when moving traditional, SEP, or SIMPLE IRA funds into a SIMPLE IRA.
Rules for HSA Transfers and Rollovers
A health savings account (HSA) allows you to set aside pre-tax earnings to pay for qualified medical expenses. Transfers and rollovers from Archer MSAs and HSAs into other HSAs are permitted, but you must be aware of the following:
- Transfers are not taxed since you are moving from one custodian to another custodian.
- You can perform as many transfers as you’d like within a 12-month period.
- Rollovers are non-taxable provided you deposit the funds into your new plan within 60-days as outlined above.
- You can only perform one rollover within a 12-month period.