By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management AdvisorSM
Accredited Investment Fiduciary®
Rollovers and transfers are ways to move retirement money from one account to another. Sound like semantics? Not to the IRS. Each comes with its own set of rules.
A financial institution that holds your money is called a custodian; they have “custody” of your funds. You are rightfully allowed to move your money if you wish to choose different investments and hence, a different custodian. For example, if you are a plan participant (meaning you participate in the 401(k) or other retirement plan) and you leave an employer, you’ll typically have four options (and may engage in a combination of these options): leave the money in the former employer’s plan, roll over the assets to your new employer’s plan if one is available and rollovers are permitted, cash the account out, paying taxes and possibly penalties, or rollover to an IRA.
Rollovers can be direct or indirect. As an example, I had a new client recently who wished to move his money out of his former employer’s 401(k) plan into investments that were not offered in the 401(k). We opened the IRA account and called the administrator of his 401(k) to request a direct rollover, instructing the 401(k) custodian to make the check payable to the new account custodian, for benefit of the account owner. As is common with 401(k) rollovers, their policy was to send the check directly to the account owner. He brought the check in and we immediately deposited it into his new IRA account. This qualifies as a direct rollover, because the check was made payable to the new custodian (for his benefit) and was immediately deposited into his new IRA account. There were no taxable consequences. Conversely, if the transaction would have been an indirect rollover, the check would have been made payable to the account owner directly, taxes withheld and if the client wished to have the continuance of retirement account benefits, would have a strict 60 days to deposit the money into another retirement plan such as an IRA. With taxes being withheld in that circumstance, in order to get the full amount that came out of the original retirement account back into the new retirement account, he or she would have to come up with funds from other sources (to replace the withholding). If more than 60 days passes, the amount that was not deposited into the new retirement account is considered a distribution, subject to taxes and if prior to age 59 ½, applicable penalties. There is also a one-rollover per year rule that applies to indirect rollovers that you can read through at irs.gov.
Trustee-to-trustee transfers happen between IRA custodians. When we bring in new accounts that are held as an IRA to be transferred into a new IRA, transfer instructions are sent to the current custodian of the money and the transfer is done directly between the two IRA custodians. The client does not receive a check and there are no taxable consequences. Trustee-to-trustee transfers are generally quite simple.
If you wish to move your retirement funds from one account to another, be sure you are clear on the various transfer procedures and rules. Rollovers and transfers can be done quite easily but if done incorrectly, may result in regrettable taxes and penalties.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for an individual.