In this series of articles about IRAs, I explained so far basic rules that every IRA owner must learn and understand to contribute and withdraw funds from these retirement accounts.
However, IRA owners will need to do more than just contribute and withdraw money from their accounts. To manage the already established accounts, IRA owners will need to transfer funds between accounts occasionally to implement their overall financial strategy.
Obviously, IRA owners can withdraw – or take a distribution – from their IRA accounts at any time and transfer those funds to another investment account if they are willing to incur income taxes and pay applicable penalties. However, the purpose of direct transfers and direct rollovers is to transfer funds between qualified retirement plans without any income tax liability and without any penalties.
There are two types of fund transfers between retirement accounts – direct and indirect rollovers. Direct rollovers are transfers that involve movement of funds from one retirement plan account directly to another retirement account, without the IRA owner gaining control at any point during the transaction. An indirect rollover is a fund transfer between two qualified retirement plans where the IRA owner takes a tax-free distribution of funds from the original retirement plan, which then must be reinvested in another retirement plan within 60 days. Otherwise, the tax-free status will expire and the IRA owner will have to pay income tax and applicable penalties on the amount withdrawn from the IRA. Unlike a direct rollover, which bypasses the IRA owner and moves the funds directly between two retirement accounts, the IRA owner controls of the funds during the interim period in an indirect rollover transaction.
I am using direct rollover and indirect rollover terms to differentiate the two types of transactions in my articles. However, please be aware that occasionally you might encounter different terminology. Some writers will use the term transfer to mean direct rollover and the term rollover to mean indirect rollover. The U.S. Internal Revenue Service (IRS) uses the terms direct rollover and 60-day rollover. Regardless of which terminology you encounter, the rules and regulations that govern these transactions are identical. Below is a bullet-point summary that an IRA owner must know and follow for direct rollovers, since I will illustrate the rules for indirect rollovers in a separate upcoming article.
1. An agent-to-agent transfer of one’s IRA to be combined with another IRA of the same owner. The IRA owner may be sent a check from the IRA custodian for the IRA transfer amount, but the check must be made out to the receiving IRA, not to the IRA owner.
2. An unlimited number of direct agent-to-agent rollovers may be done per year without tax or penalty.
3. Most retirement plans may be rolled over to one’s Traditional IRA (TIRA) when the retirement plan allows, usually after one separates from the employer or drops 4. below full time.
5. Roth IRAs (RIRAs) associated with an employer-sponsored retirement plan may be rolled over to one’s individual RIRA when the plan allows, but usually after the employee has left the employer.
6. Deferred compensation from a private employer and non-profit 457(b) plans may NOT be rolled over to one’s IRA.
7. SIMPLE IRAs may not be rolled over during the first two years after the original contribution to the SIMPLE IRA. Rollover during the first two years will be considered by the IRS to be a full withdrawal of the balance of the SIMPLE IRA, which also will be subject to a 25% penalty.
8. An inherited IRA may be transferred to another custodian after the designated beneficiary has been established on the inherited IRA. This must be an agent-to-agent transfer.
a. Some IRA rollovers are not allowed.
b. Inherited IRAs may not be rolled into one’s own IRA unless the beneficiary is the spouse
c. Two separately inherited IRAs from different decedents may not be rolled together.
d. A TIRA or retirement plan balance may not be rolled into one’s RIRA unless the owner is doing a Roth conversion.
e. Multiple TIRAs or multiple RIRAs inherited from the same person may be rolled over into a single inherited IRA, but they must be direct rollovers.
These are just the high-level rules and, as always, IRA owners should do their own research or consult a professional advisor to make sure which rules are applicable to their specific situation. In my next article, I will share a few real questions about direct rollovers that I encountered to illustrate a few specific customer situations and provide some general guidance on each case.
Bruce Miller is a certified financial planner (CFP) who also is the author of Retirement Investing for INCOME ONLY: How to invest for reliable income in Retirement ONLY from Dividends and IRA Quick Reference Guide.