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IRA Rollover vs Direct Transfer vs Direct 401k Rollover: Options on How to Move Your Retirement Assets to a New Custodian

Are You Confused By It All?

Once you have decided to move your IRA or a portion of your IRA assets to a new custodian, what’s next? There are a few options that you need to be mindful of, but first, we need to identify the difference between a transfer and a rollover. You often hear people misuse the term rollover, but it’s important to know the difference when you are speaking with your custodian.

Direct Transfers

Transfers occur when money is sent from one IRA to another IRA. It can be the full IRA, or it can be just a portion of the account, it’s really up to the investor and their individual needs. Transfers between IRA’s are not reported to the IRS. It is also not considered a taxable event because the individual never has receipt of the money.

Video Highlight Reel

[ 00:29 – Most individuals use the word Rollover universally to describe moving any qualified retirement assets from one custodian to another, but there is a distinct difference between a Rollover, a Transfer and a Direct Rollover from the point of view of the custodian. Terry explains the differences. ]
[ 00:45  – What is an IRA Transfer exactly? ]
[ 01:00  – A Transfer does not get reported to the IRS and why? ]
[ 01:10  – What is a Rollover? To your custodian, this term means something very specific. ]
[ 02:02 – Terry covers the 60-day rollover rule. ]
[ 02:44 – There is a new IRS tax court decision that impacts the number of Rollovers you can accomplish per year and how often. You don’t want to mess this up. ]
[ 03:49 – How to initiate a Direct Rollover with your previous plan administrator ]
[ 04:21 – Terry recaps the differences between a transfer, a rollover and a Direct Rollover and how they are reported or not reported to the IRS in the case of a Transfer. ]

If you have any questions, then contact our office at 1-800-642-7167.

Rollover 401k to IRA: Are There Tax Consequences?

Rollovers, however, are treated differently. In the case of a rollover, you would request a dollar amount to be rolled over to a new IRA. Similarly, you can just rollover over a portion of your 401k, which is known as a partial 401k rollover. The current custodian would issue the money requested to the individual and it is the responsibility of the individual to deposit the retirement funds with the new IRA custodian. Rollovers are reported to the IRS and a 1099 form will be issued from the original custodian to the individual for tax purposes. When the money has been deposited into the new IRA, the new custodian will have the individual sign a rollover certificate, which should abate a taxable event and tells the IRS the money was moved and deposited within 60-days.

How Long Do I Have to Rollover my 401k?

1) If you do not complete the rollover process within a 60-day window, then you will be liable for the tax consequences and penalties that ensue. This is known as the 401k 60-day rollover rule and it must be followed to the tee.

If, however, you exceed the 60-day rollover rule, then you can apply for a private letter ruling to get the money put back into a qualified retirement plan without the money being considered a distribution, but this will also be costly.  The private letter ruling has an application fee of anywhere from $500-$3,000 and when you file this ruling, you must also be able to prove events beyond the reasonable control of the IRA owner.

A Financial Waiver for the Disorganized?

There is an automatic waiver of a financial organization error if the assets are deposited into a qualified retirement account within one year. 

Rollover Occurrence Rule

2) It’s also important to note with a rollover you are only allowed one rollover every 12 months per taxpayer, not per account owned by the taxpayer. For example, if you complete a rollover in October of this year, then you will have to wait until November of the following year to complete another one, so make sure to factor that into the equation for your investment planning. For more details, check out the recent court decision upheld in US Tax Court, Bobrow vs. Commissioner.

Hear from other financial industry experts… “… the Internal Revenue Service is changing the rollover rules for individual retirement accounts in response to a recent Tax Court ruling.” David Waddington, CPA, a partner at Friedman LLP and managing partner of Friedman’s pension division Benefits21 LLC, discusses the changes to the IRA rollover rules on AccountingToday.com’s UnAudited Podcast. The podcast excerpt is only 8-minutes and it is worth listening too.

The IRS in Pub 590 interpreted the original intent of the tax law incorrectly. Oops! From the details of the podcast, there is a definite re-write forthcoming for Pub 590, as it relates to Rollovers and distributions. As good as the guidance of the IRS Pubs are, they aren’t a substitute for the tax law! The good news is there is a temporary amnesty for taxpayers. Taxpayers have until Jan 1, 2015, to comport with the aggregated rule for distributions.

Direct Rollovers

And lastly, you might be wondering about transferring a 401k. With a 401k, you need to contact your plan administrator and let them you would like to transfer some of your IRA to a new account. They will give you a form called a Direct Rollover. With a Direct Rollover, your plan administrator will create the documents and send the money to the new IRA.

If you have any questions about what type of transfer or rollover is best for you we suggest you speak with a tax attorney or a CPA. Be sure to check out and share our video on YouTube. https://www.youtube.com/watch?v=0osCov3L57A

Takeaways: 

People often confuse Rollovers with Transfers, but there is a difference. (Tweet To Your Friends Now!)
With a Rollover, you have a 60-day window to complete it. What happens if you don’t? (Tweet This)
New IRS court ruling will impact how often and how many rollovers you can make per a 12 month period. (Tweet Now)

Read the Full Transcription:

Transfer v. IRA rollover v. Direct Rollover – Which is More Advantageous?

Hi, my name is Terry White. I am the CEO of Sunwest trust. Today is Tuesday at 2 o’clock. Since last week and for the last couple of weeks we have been talking about freedom. We are talking about the freedom to invest in things other than stocks, bonds, and mutual funds. Last week we talked about the freedom to move your retirement account. Now we’re going along with that idea. The freedom to move your account. We’re going to talk about how you can move your account. Everybody talks about moving accounts in a typical use of the word “rollover”. That is to roll my account over to you guys. I will explain the difference between a rollover and a transfer. There is a very distinct difference and it is a very important difference.

The first is a transfer. A transfer is when you move your IRA account from an existing custodian to another custodian. That is called a transfer. The money never is sent to you individually. It moves from one IRA to another IRA. That transfer is not reported to the IRS. That’s because you never received the money. There is no taxable event in a transfer.

Now the word that most people use is “rollover”. That transaction is something very specific. A rollover is when you go to an existing custodian and you say that you would like to receive a check for $50,000 out of your account. They will write a check to you personally. Then it does not matter what you do with a check. That is if you put into your checking account and later you write a check to Sunwest Trust. You want Sunwest Trust to “roll” the money over into another IRA from Sunwest Trust. Another alternative is that you take the check from whatever custodian and bring it to Sunwest trust. Then you endorsed the back of it. No matter what the case the old custodian is going to send you a 1099 form. They’re going to report that transaction as a distribution to you.

Next what occurs is that you go to Sunwest trust. We will have you sign a rollover certification. Basically, it will say that you have not had that money more than 60 days. Next, we will perform the rollover certification. The money will be rolled over into your IRA at Sunwest trust. Then, you will report it to the IRS as a rollover. I believe the right placement is line 15 and 15A on your 1040 form will ask “how much was the distribution and how much was taxable.” Honestly, I’m not certain about the line number since I’m not a tax accountant.

You need to have your tax representative look at that. Basically, it should say that you took $15,000 out of your IRA and ‘by the way’ I put it back into my IRA stored at another institution. I did that within 60 days.

Up until sometime this year, there was an IRS decision that you can only do that once a year per taxpayer. This is a significant change because prior to that rollovers were allowed once a year per IRA account. The IRS decided that … ‘No’ you can only do one rollover. That is not per the calendar year but per 12-month period. That means if I do a rollover in October I cannot do another rollover until November of the following year. It is not possible to do one in January even though we are now in a new year. It has to be only one within the 12- month period. I hope that helps answer those two questions.

The third type of retirement account that you might want to transfer money from is a 401(k). We talked about last week how you can move your money from a 401(k) or not. Let’s assume that you can. This is going to be called a Direct Rollover. What you do in normal circumstances if you are moving from an IRA. Then you fill out a transfer form from Sunwest trust or you can get the money out which you could do with a 401(k). Typically, the best thing to do is to get a hold of your plan administrator. Tell them that you want to transfer the money to an IRA at Sunwest trust. They will give you the paperwork to fill out. Next, they will transfer the money afterward.

So instead of the form coming from us like it does with an IRA. It will come from the plan administrator of the 401K. They will move the money to us. That is called a direct rollover from a 401(k).

In summary, first, you have a transfer which is not reported. Then, you have a rollover which is reported but is still not taxable if you get the money back into an account within 60 days. Then you have a direct rollover from a 401(k). If you have any questions about the information, then please feel free to call us 1 800 642-7167.

End of Transcript

Summary of Recommended Resources:

Sunwest Trust YouTube channel – Click Here

US Tax Court Bobrow vs. Commissioner – Click Here

9 Common IRA Rollover Mistakes  – Click Here

IRS Clarifies IRA Rollover Limitation – Click Here