Switching your IRA investment to a better option or when you change employers can be done using a transfer or a rollover. However, they both have their own tax implications, so it pays to know the difference between the two before moving them to avoid losing their tax advantages.
A transfer involves moving IRA assets directly from one trustee to another trustee of the same account type. This way, the funds are handled by the custodians of the IRA accounts instead of the account holder, so the move is tax-free.
A rollover allows the account holder to relocate funds from one type of IRA account to another type of retirement account, depending on whether they choose a direct rollover or an indirect rollover.
When the account holder moves the IRA funds themselves, it is called an indirect rollover.
During an indirect rollover, the funds from the retirement plan are made available to the account holder, giving them direct possession of their assets. However, to avoid tax and early withdrawal penalties, the funds must be deposited into a new IRA account within 60 days.
On the other hand, should the account holder choose a direct rollover, the funds are simply moved from their current retirement plan to the new type of retirement plan. Hence, the funds are not subject to taxes or early withdrawal penalties because they go directly to the new IRA.
If you have an IRA account you would like to roll over between retirement account types as often as you’d like, then a rollover may be the option for you. However, the IRS does limit rollovers to just one per year for IRA accounts of the same type.
An IRA rollover is also a good choice if you need your funds quickly and would like them to shift accounts right away.
With an IRA rollover, you also have up to 60 days to transfer the funds using an indirect rollover, which gives you time to choose a good IRA service provider.
If you would like the freedom to move your IRA funds as many times as you’d like throughout the year without tax penalties, then a transfer may be the best option for you. However, transfers take a bit longer to complete than an indirect rollover.
They are also a great option if you are looking for an easy way to move your funds between IRA plans because the custodians of the accounts do it all for you, thus also eliminating the threat of taxes and penalties associated with taking hold of the distribution yourself.
Ultimately, whether you choose a transfer or a rollover depends on various factors, including your current retirement plan and the new account you want to open.
However, according to the experts at SoFi, “whether you’re just getting started or want to roll over to another account,” they can help develop an ira investment plan that works for you to help eliminate the guesswork.