Rollover funds from retirement accounts involve financial institutions exchanging money among themselves in what’s known as a trustee-to-trustee transfer or direct rollover.
Another way of rolling over an IRA is via indirect rollover, in which your financial institution sends you a check which must then be deposited within 60 days into your IRA account.
Access to Alternative Assets
When moving money between retirement accounts at work or other sources and new providers, a person typically has two options for moving their savings: direct transfer or rollover.
Direct transfers are often the preferred means of asset relocation because they do not give new custodians access to your personal data. Your former sponsor sends a check payable directly to your new custodian who then deposits it directly into your IRA – however, please be aware that any taxes withheld from this distribution must be deposited back within 60 days or you could face tax penalties (if under 59 and half).
Indirect rollovers are commonly utilized when someone changes jobs or wishes to use their IRA funds for alternative investments like startups, real estate, private credit or crypto. This practice allows individuals to diversify their portfolio and reduce risk from any single investment that fails.
The IRS places restrictions on how often you can rollover funds between types of retirement accounts or roll over between IRAs, known as rolling. When doing a rollover, deposits must be made within 60 days to avoid paying taxes on any pretax contributions or earnings as well as an extra 10% tax penalty if you are younger than 59 1/2.
Trustee-to-trustee transfers, commonly referred to as direct transfers, offer the simplest form of IRA transfer. Here, your retirement plan custodian sends money directly to another institution that then moves it into your new IRA account.
If you opt for an indirect rollover, your plan sponsor will send a check directly to you; it is your responsibility to deposit this funds into an IRA within 60 days or else the IRS considers this distribution an early withdrawal and will require income taxes plus an early withdrawal penalty of 10%. Exceptions apply if converting from traditional to Roth or between SEP and SIMPLE IRAs respectively.
No matter if it’s direct transfer or manual IRA rollover, all participants must abide by specific IRA rollover rules in order for their distributions not to become taxable.
Transferring an IRA between custodians can be an efficient and secure method to transfer retirement assets between accounts. Simply contact your old sponsor with your request to have funds sent directly into the new one; using this approach may help avoid the 60-day withdrawal rule and trigger tax events that trigger taxes upon distributions.
Transferring retirement money between employer-sponsored accounts and self-directed IRAs (SDIRAs). SDIRAs provide similar benefits as traditional IRAs but allow you to invest in alternative assets like startups, real estate, private credit, crypto currency and others not normally found elsewhere in retirement accounts. You can manage it yourself or have a financial advisor do it on your behalf – although fees associated with investing may apply; you can reduce this impact by purchasing investments with lower fees.
Direct Rollover involves moving assets directly from your former employer’s plan to your new sponsor, eliminating much of the complexity involved with indirect rollover. With direct rollover, assets are sent directly from former to new plan sponsors without needing to endorse and deposit checks from previous sponsors within 60 days in order to avoid taxes and the 10% early withdrawal penalty.
Direct transfers allow you to move assets directly, without first liquidating them into cash. This may be beneficial if your old retirement account contains assets you wish to invest in alternative assets that diversify and potentially lower risk.
Keep in mind, though, that the IRS only permits one rollover per year between traditional, Roth, SEP or SIMPLE IRA accounts and any pretax accounts such as 401(k), 403(b), 457(b)s or Thrift Savings Plans.