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What is the difference between a rollover and a transfer?

When moving retirement funds, the two most common methods are a rollover and a transfer. Both move money between accounts, but the process and tax rules are different.

1. A rollover occurs when money is withdrawn from one retirement account and then deposited into another. In some cases, you may temporarily receive the funds before placing them into the new account.

• You generally have 60 days to deposit the money into a qualified account to avoid taxes and penalties.

• If the deadline is missed, the IRS treats the amount as taxable income, and early withdrawal penalties may apply.

• Rollovers are often used when leaving an employer and moving funds from a 401(k) into an IRA.

Types of rollovers:

• Direct rollover: Funds are sent straight from your old plan to your new account. This avoids taxes and is the preferred option.

• Indirect rollover: Funds are sent to you first, and you must deposit them within 60 days.

Account type rules:

• Roth 401(k) funds must be rolled into a Roth IRA.

• Traditional 401(k) funds must be rolled into a Traditional IRA.

2. A transfer (also called a trustee-to-trustee transfer) is a direct movement of funds between financial institutions. The account owner never receives the money.

• The funds move directly from one custodian to another.

• There are no tax consequences and no deadlines.

• Transfers are commonly used to move IRAs from one provider to another.

• This is often the simplest and safest option.

 

Key Differences