Two distinct ways exist to move assets from one IRA, or retirement plan, to another: trustee-to-trustee transfers and rollovers. Several important rules regarding rollovers should be considered whenever one is completed.
Trustee-to-Trustee Transfers
A trustee-to-trustee transfer occurs when funds in an IRA are transferred from one trustee to another. For example, if assets currently in an IRA held at Fidelity are transferred to an IRA at Schwab, and if the IRA holder never takes funds “in-hand”, this is a trustee-to-trustee transfer. In this case:
- The transfer is tax-free, because there is no distribution to the owner of the IRA
- The transfer is not considered a rollover, and therefore is not affected by the one-year waiting period required between rollovers (discussed below).
Rollovers
A rollover is generally a tax-free distribution of assets or cash in one retirement plan to the owner of the plan that is then contributed to another retirement plan or IRA. The contribution to the second retirement plan is called a “rollover contribution”. Rollover contributions come from two primary sources: other IRAs, and retirement plans. If the holder of an IRA takes possession of the funds, and then contributes them to another IRA, this is considered a rollover. Also, if an employee leaves a company, he or she is able to rollover funds from a retirement plan, such as a 401(k), into an IRA. Funds received from an IRA must be rolled into another IRA within 60 days. If funds are held for more than 60 days, the distribution is considered a taxable distribution.
A one-year waiting period must be adhered to following a rollover. Funds rolled from one plan or IRA must remain in the Rollover IRA for a period of one year. If a distribution occurs within the year, the distribution is taxable, and cannot be rolled over into another IRA or retirement plan.
Recommendations
- IRA transfers: We recommend that when possible, all transfers between IRAs should be completed as trustee-to-trustee transfers. This means the IRA holder will never receive a check that needs to be deposited in another IRA. The assets in the first IRA will be transferred directly into the second.
- Retirement plan rollovers: We recommend that when a rollover is to occur from a retirement plan (such as a 401(k)) to an IRA, the IRA Rollover account should be opened initially before the rollover is started. The new IRA Rollover account number can then be entered onto the rollover form (provided by the employer who provided the retirement plan), and the assets can be moved.
In either case, taxes are avoided on the rollover, as long as the 60-day rollover period is not violated, and the one-year waiting period is not violated. If you have questions regarding a pending transfer or rollover, you should contact your financial planner before the rollover or transfer occurs. For more information, contact Henssler Financial at 770-429-9166 or experts@henssler.com.
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
