Difference Between an IRA Rollover & a Transfer

Knowing the difference between a rollover and a transfer could save you some money on taxes.

Individual retirement accounts are retirement vehicles that let you defer taxes until your retirement. A particular type of IRA, the Roth IRA, allows you to make tax-free withdrawals during retirement. IRA accounts are held with either life insurance companies that have in-house brokerages or separate brokerage houses. But during the accumulation phase, if you want to change brokerages, you will need to know how to move your IRA money.

Types

There are two ways to move your IRA money. You can transfer the money, or you can roll it over. A rollover involves taking receipt of the money prior to establishing a new retirement account. A check is issued to you from the brokerage and you have 60 days to set up your new retirement plan. A transfer moves the money from one brokerage to another, directly, without you having to take receipt of the funds.

Significance

Because a rollover allows you to take receipt of the funds, taxes are withheld before the money is given to you. Once you open up a new retirement account, you must then direct the withheld tax money to the new account. A transfer, in comparison, does not involve any withholding.

Function

With a rollover, you simply call the brokerage house and request that your IRA be liquidated and a check be mailed to you for the balance. A transfer involves meeting with an investment adviser so that you can set up a new account with him. The adviser then processes all of the paperwork on your behalf and directs the funds to an account that you want to set up.

Misconceptions

A common misconception regarding a rollover and transfer is actually in the name of the action. While they accomplish essentially the same thing, a rollover is more involved for you. If you choose to roll your IRA money over yourself, you will have to take the time to make sure that you do not violate the 60-day window (or you will incur taxes and potentially a penalty if you are under age 59 1/2) and that you transfer your withheld taxes over to the new account once you've established it.

Considerations

Before choosing between an IRA rollover and transfer, make sure that you understand the differences between the two methods. For most, a transfer makes more sense and involves less work. There is no chance for taxes to be incurred because of a missed due date and no withholding to deal with. However, if you want complete control over the process, the rollover is going to provide you with that option.

References

• The Motley Fool: IRA Rollovers vs. IRA Transfers
• "Practicing Financial Planning for Professionals, practitioner's 10th edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
• "Ernst & Young's Personal Financial Planning Guide, 5th edition"; Martin Nissenbaum, Barbara J. Raasch, Charles L. Ratner; 2004