Today, our topic is moving your IRA account from one custodian to another. There are a couple ways to do this.
Many times our clients use these two words Transfers and Rollovers interchangeably, but they are two completely different things. It is important to know the rules to avoid either a prohibited transaction or a taxable event. However, in order to determine which is best for your situation, you must understand the difference between a Transfer and a Rollover.
Let’s say you have your IRA account at custodian A, and you want to move it to custodian B. The best way to do that, and the fastest way to do it, is to complete a transfer. That is where you set up your account with custodian B. You fill out a transfer form. They send that transfer form to custodian A, and the money or the assets are moved directly from one custodian to another.
What Should You Know About The IRA Transfer Option?
1. There’s no IRS reporting required.
2. There are no restrictions.
a. You can do this as many times as you want to as long as you are making a transfer from one custodian to another.
b. You may transfer an IRA to another IRA Custodian at any time.
The other option for moving your account is called a rollover. This is where you request the money yourself from custodian A, and they send the money directly to you. You have 60 days to move the money back into another qualified custodian. The 60-day restriction in this case is very important. If you go over the 60-day limit, then you cannot put it back into an IRA with any custodian, and it would be considered a distribution.
Another thing that’s important to know about rollovers is that they are not bound by the calendar year January – December. You can only complete them once per 12-month period. Whereas, transfers, can occur as often as you like.
Rollovers and IRS Reporting
Another thing about a rollover is that custodian A will give you a 1099-R (R stands for Rollover) and report this transaction to the IRS as a distribution to you. Custodian B will require a rollover certification, and they will report this transaction to the IRS and to you on a 5498.
Put simply, a transfer does not get reported, but a rollover does get reported. Therefore, in the event of a rollover, you have to be mindful of how you handle it on your tax return.
One thing I need you to know is that Sunwest Trust does not give any tax advice. This article is for information purposes only. If you have tax questions, we recommend that you talk to your CPA or your tax attorney. Hopefully this article has been worthwhile to you, and we encourage you to watch our videos and sign up for our newsletter for more information.
Anytime you are moving money from a 401k, 403b, 457, TSP, etc. it is always done as a rollover or a direct rollover. In the case of a rollover, your plan administrator will either make a check payable to your new custodian or a check made payable to you, the client. The check will be mailed directly to you and you will have 60 days to get that money back into a Qualified Retirement Plan. The plan administrator will issue you a 1099-R in the amount of the rollover. If you fail to get the money back into a Qualified Retirement Plan within 60 days, the money is considered a distribution and you are liable for any taxes and penalties associated with the distribution of funds. If you do get the money put into a qualified retirement account within the 60 day time frame, then you will fill out a Rollover Certificate showing that you did not have the money in your possession for more than 60 days and the new IRA Custodian will issue a 5498 to the IRS showing that the money was put into the account.
A direct rollover is much like a transfer, but it is used when moving money from a 401k, 403b, etc. into an IRA. In this case, the plan administrator will cut a check from your current account, made payable to the new Custodian for the benefit of your new account. The check will be sent directly to the IRA custodian, but you will still need to fill out a Rollover Certificate.
It is also considered a rollover anytime you take constructive receipt of money from a Qualified Retirement Plan. For instance, let’s say you take a distribution and then decide that you want the money back in your retirement account. You will simply need to return the money within 60 days of the day you received it. This would be considered a rollover and you would not be eligible to do another rollover from that account for 12 months.
It is important to note that you may only do one rollover, per account in a 12-month period. This means, if you rolled your 401k money into an IRA in December, then you would not be eligible to roll that money over again until the following December. If you have any questions about rollovers or transfers, please contact your CPA or tax professional.
Do you have more questions regarding Rollovers? Have a look at the chart below.