IRA Rollover & Transfer Regulations

IRAs are Individual Retirement Accounts. These accounts are tax shelters designed to help you save money for your retirement. They do this by deferring investment earnings inside of the account. During your lifetime, you may want to transfer your IRA balance from one IRA to another. When doing this, make sure you understand the rules for IRA rollovers and transfers.

Types

• There are two ways to move your money. The first way is called a transfer. A transfer refers to a direct transfer between custodians. A custodian is the financial institution that is holding your retirement savings. A rollover is the other way to move money between two IRAs. A rollover allows you to make the transfer of money yourself.

Function

• When performing a transfer, you fill out a transfer form with your insurer or brokerage house. In many cases, the insurer or brokerage will also be the custodian of your funds. The custodian then transfers the funds to your new IRA for you. With a rollover, your custodian sends you a check for your IRA balance, less 20 percent for taxes withheld. Then, you deposit the new funds into your bank account. Finally, you deposit the funds into your new IRA.

Benefit

• The benefit of a rollover is that you are in full control of the process. You may choose where to deposit your funds. Additionally, you can choose to keep your funds and not redeposit them into an IRA. The benefit of a transfer is that you don't need to go through the hassle of depositing your IRA funds into your checking account and then transferring them again to your new IRA. A transfer simplifies this process by having the custodian do most of the work for you.

Disadvantage

• The disadvantage of a transfer is that, if you want control over the process, you don't have it. A greater disadvantage comes with a rollover. First, the IRS only allows one rollover per 12 months from the same IRA. Additionally, funds rolled over can only be rolled over once per 12 months. This means that you can't roll funds from one IRA to another and then roll those funds over again. Also, if you do not open a new IRA within 60 days, the IRA rollover will be treated as a distribution subject to income taxes. If the rollover is performed prior to your age 59 1/2, then you will also be subject to a 10 percent penalty.

Considerations

• In most cases, a transfer is the ideal option when moving funds. A transfer is simpler and does now allow for the potential for premature taxation of your retirement funds. If you do decide to perform a rollover instead of a transfer, make sure you have done all of your research prior to accepting the funds from your existing IRA. This will make the rollover go quickly and eliminate any delays in setting up your new IRA.