It can seem a little overwhelming trying to figure out if you are doing a rollover or a transfer. In theory they are very similar and are very easily confused. Because there are differences and if handled incorrectly costly difference you will want to make sure know the difference between a rollover and a transfer. Again both a rollover and a transfer can seem very similar but they are not. We are here to help you through the process. If you have any questions or concerns about a rollover or transfer of your self directed IRA, IRA or 401k then we are here to help. Now, let's get into what separates a rollover and transfer.
Rollover- Also known as, IRA rollover, 401k rollover. A rollover is when you take from one retirement account (it can be an IRA or 401k) and move it to another retirement account (again it can be an IRA or a 401k).
One major thing to remember with a rollover is that you the account owner are given the asset (money) before it goes into the new retirement account. It is considered a tax-free distribution. However, you must put this distribution into the new retirement account within 60 days of receiving it. If you don't put the money into the new retirement account within 60 days a myriad of negative consequences will come.
The negative consequences come in the form of tax penalties. First it will be considered a withdrawal/distribution and becomes taxable. That is not all, if you are under the age of 59 1/2 you will get tacked on a 10% penalty for a premature withdrawal. You will need to have a paper trail to verify that the funds were deposited within the 60 days.
Another important thing to note is that you can only do one rollover a year. Why? It is best explained with an example. Say you did a rollover and were given the money from your previous retirement account. You then have 60 days to put it in the new account. Before those 60 days you take the money to Vegas and double your money. It is still within the 60 days so you put the original amount into the new retirement account and have doubled your money. They don't want you to continue to do this over and over again, which is why they only allow it to happen once a year. Nor is it a wise decision to do anything else with your money besides putting it into the new retirement account. You wouldn't want to get to the 60 days and not be able to deposit the money into the new account.
Transfer- Also known as an IRA transfer, 401k transfer or trustee to trustee transfer. A transfer is when you take from one retirement account (IRA, 401k, etc) and move it to another retirement account (IRA, 401k, etc). Typically a transfer is a much easier processes than a rollover because of one main aspect, you aren't getting the money. With a transfer you typically are transferring from custodian to custodian and so there are no tax penalties. You can do transfers like this as many times as you want each year.
Hopefully, we have spelled out the main differences enough that you won't have to wonder the next time you are in the process of either a rollover or transfer. As always we are here to help you with self directed IRA and will answer any questions you may have in regards to these accounts.
Author: Nick Barker