In our business, like any other, there are lots of industry-specific words and jargon. So part of our job is to help explain this kind of insider lingo. Two such terms that pertain to IRAs and other retirement accounts are Transfer and Rollover. The difference between the two is a big deal. So, let’s examine them:
A rollover is different from a transfer because it involves two different types of plans. A rollover is when you move assets from an Employee Retirement Income Security Act (ERISA)-governed plan into an IRA.
In a direct rollover, you are moving funds from a qualified retirement plan that is not an IRA, like a 401(k) or 403(b) plan, into an IRA. The funds are sent directly from one provider to another. Through a Roth conversion, you can also roll over a traditional IRA into a Roth IRA. In an upcoming post, we will go into detail about the traditional/Roth IRA tax implications, which you should be aware of. For right now, just know that with a Roth conversion, you will have an immediate tax penalty but will be able to withdraw the funds tax-free as soon as you reach the eligible age.
With an indirect rollover, also known as a 60-day rollover, you are moving funds from a qualified retirement plan, but take possession of the funds before putting them back into an IRA within the 60-day window. For example, you take a distribution by check and deposit those funds into a personal bank account. So if you would need cash on hand for something, you could put the disbursement into your checking account. Be careful with this because you need to deposit the full amount back into an IRA within 60 days to avoid a tax penalty.
Direct and indirect rollovers are non-taxable events, but there is a restriction to one rollover per 12-month period.
A transfer from one IRA to another is also a non-taxable event. You can do this multiple times a year per IRA. With a transfer, you are changing either the investment manager or company, but keeping the tax treatment and registration the same. You can’t transfer a Roth IRA into a traditional IRA, only another Roth. You CAN transfer a traditional IRA into a SEP IRA, and vice versa.
Rollovers are generally faster than transfers, so if you need money quickly to cover some sort of unexpected expense, an indirect rollover gives you some time and flexibility with the 60-day window.
The downside of the rollover is that you get a limited number of rollovers, as mentioned above, only once per 12-month period. And proceed with caution with the indirect rollover. You can only hold your funds for up to 60 days. With a 10% tax penalty on the line, you want to make sure you can replace the full amount of funds into the new IRA within those 60 days.
With both a rollover and a transfer, there will be paperwork to sign. Which brings us to another bit of jargon you should know: Medallion. A Medallion Signature Guarantee holds a higher degree of authentication than notarizing. Some say a medallion is not needed, but the bank is likely to require it in order to rollover or transfer monies into an IRA account. This is a way of ensuring that money is not taken from an account without your authorization.
Is now the right time to plan for a rollover or transfer? We can’t answer that for you, but knowing more about each scenario gives you options to use now – or in the future.