What it means
An IRA is held at a financial institution such as a bank, broker or fund manager, and it can be moved to another institution if the owner wants lower fees, better service or a wider choice of investments. The key idea is that the money stays in the retirement system throughout.
If it does, the move is not treated as a withdrawal and does not trigger income tax. The cleanest method is a direct, or trustee-to-trustee, transfer.
The old provider sends the money straight to the new provider, and the account holder never takes possession of it. There is no limit on how many direct transfers a person can make in a year.
The alternative is an indirect rollover, where the old provider pays the money to the account holder, who then has a limited period, normally 60 days, to deposit it into another retirement account. Miss the deadline and the amount may be treated as a taxable withdrawal, with an additional penalty if the holder is under the age that allows penalty-free access.
An indirect rollover is also subject to a rule that limits how often it can be used for IRA-to-IRA moves, so it is riskier than a direct transfer. Transfers can also be in cash or in kind.
An in-kind transfer moves the actual investments, such as shares, without selling them, which avoids selling at an unlucky moment and avoids any dealing costs. The receiving provider must be willing to hold those investments.
Business owners and finance staff meet this concept when advising employees, when handling the retirement benefits of departing colleagues and when comparing providers. Tax rules and limits change, so the details should always be confirmed with the provider or a qualified adviser before any money moves.
The paperwork is usually simple. The new provider supplies a transfer request form, the account holder fills in the old account details, and the new provider contacts the old one to move the money.
Fees such as account closure charges should be checked in advance, because they come out of the balance being moved.
In practice
Real-world examples.
Example
A marketing manager leaves a firm and holds a $140,000 IRA with a high-fee provider. She opens an account with a low-cost broker and requests a direct transfer. The money moves between the two institutions in about two weeks, and no tax is reported on the move.
Example
A consultant wants to hold investment shares in his IRA in a self-directed account. He asks the new provider to accept an in-kind transfer of his existing holdings. The shares move across without being sold, so he keeps his position and avoids dealing costs.
Example
A sales director takes a cheque from her IRA provider intending to move it to a new account, but gets distracted and deposits it on day 70. The deadline has passed, so the amount is treated as a withdrawal and she owes tax on it. She learns that a direct transfer would have avoided the risk completely.
Case study
Seen in the real world.
Pemberton Advisory is an illustrative, fictional financial planning firm that runs a workshop for small business owners on retirement savings. At one session, a participant called Dana explained that she held three small IRAs at different providers, each charging its own annual fee. She had never combined them because she was worried about triggering a tax bill.
The adviser walked her through the options and recommended direct transfers into one account. Dana asked each old provider to send the money straight to the new one, and none of the amounts passed through her hands. The accounts were consolidated in under a month, her annual fees fell by an illustrative $400, and she had a single statement that made planning far easier.
Watch out
Common mistakes.
- Taking a cheque made out to yourself when a direct transfer would have avoided any tax risk.
- Assuming an indirect rollover can be repeated as often as a direct transfer, when there are limits on how frequently it can be used.
- Moving money into an account that cannot hold the investments you want, then having to sell them at a bad time.
Questions
People also ask.
What is the difference between an IRA transfer and an IRA rollover?
A transfer moves money directly between providers without the holder touching it, while a rollover usually means the holder receives the funds first and redeposits them within a set period.
Does an IRA transfer count as a taxable withdrawal?
Not if it is done correctly, because the money stays in a qualifying retirement account throughout.
Can an IRA be transferred to a different type of retirement account?
Sometimes, but the tax treatment depends on the account types involved, so it is wise to confirm the rules with the provider or an adviser first.
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