Transfer vs. Rollover: What's the Difference Between them?

[Updated November 2021]

Estimated reading time: 7 minutes

Opening a self-directed IRA (SDIRA) is an important step toward diversifying your retirement portfolio. It allows you to invest in alternative investments such as real estate, precious metals, private equity, and other types of assets, and it gives you complete control over how you grow your account.

Once you open your account at Entrust, you’ll need funds so you can start investing in all the exciting options SDIRAs offer. The good news is that there are several methods to fund your account, including transfers, rollovers, and contributions.  

Transfers and rollovers are the two most popular methods to fund an SDIRA. Each of them has specific rules and tax implications. We are here to help you learn about them, so that you can confidently choose the option that is right for you.

Transfer

A transfer is simply transferring a single type of retirement account to a new financial institution. When using a transfer, the account type does not change. This is also sometimes called a trustee-to-trustee transfer. 

For example, you can easily transfer your funds or assets from a traditional IRA from one institution to another institution. The account is a traditional IRA at the beginning of the transfer, and it is a traditional IRA at the end of the transfer process. This is also true for other accounts like a Roth IRA or a SIMPLE IRA. The only exception to this rule is that a SIMPLE IRA can also be transferred to a traditional IRA after it has been a SIMPLE IRA for two years. 

When using a transfer, the funds in the IRA are never made payable or distributed to the account holder. This is extremely important because it means that the assets in a transfer are not taxable, and the transfer is not reported to the IRS.

Have questions about Entrust? Book a free consult >

Rollover

Another way to move funds into your SDIRA is a rollover. Rollovers are used to move funds from one type of account to another type of account. One example of this would be moving funds from a 401(k) to a traditional IRA. There are two types of rollovers, and they have distinct tax implications. All rollovers, however, must be reported to the IRS. 

Direct Rollover

A direct rollover is a simple way to move funds from an employer’s plan to a new retirement plan or an IRA. As the name implies, this rollover option moves your funds directly from your retirement account to a new type of account at a new institution. Direct rollovers don’t require any funds to be withheld for taxes, since the funds go directly into your IRA.

Indirect Rollover

An indirect rollover requires a few more steps than a direct rollover. To initiate an indirect rollover, sometimes referred to as a 60-day rollover, the account holder requests a distribution of their retirement plan assets. For an indirect rollover, the check or wire will be made out to the account holder. 

You might notice that this is different from a transfer because the account holder takes possession of the funds. Consequently, the funds are now considered a distribution. This means that the funds are now most likely taxable and may be subject to an early withdrawal penalty. Distributions from IRAs also require that 10% of the distribution be withheld, and distributions from 401(k)s, 403(b)s, and governmental 457(b)s require 20% to be withheld.

But never fear. If you deposit the funds into a new tax-advantaged account with a financial institution like Entrust within 60 days of the distribution, the funds are returned to their tax-advantaged status. 

The IRS provides a detailed Rollover Chart that clearly explains the types of accounts that can be rolled over and the types of accounts they can be rolled into.

Keep in Mind

There are a few other things to keep in mind about rollovers.

• The IRS has a one-rollover-per-year rule when you are rolling over funds between two IRAs that are the same type. This rule applies for traditional, Roth, SEP, and SIMPLE IRAs. The rule does not apply to rollovers between account types or direct transfers.
• You cannot roll over a required minimum distribution from your IRA. 
• Most employer plans require that you are no longer a current employee to remove funds from your retirement plan. Check with them to see if they allow in-service withdrawals to complete a direct rollover while you are a current employee. 
• There are a few other details about funds you cannot roll over in retirement plans explained on the IRS rollover page.
• Don’t forget the 60-Day Rollover has a 60-day limit, so only make that choice if you are certain you can secure the funds in a new account in less than 60 days. 
  
  

Contribution

While transfers and rollovers are the two most popular methods to fund an SDIRA, you also have the option to establish and grow your account by making yearly contributions.

Contributions must be cash and can be made via check, wire transfer, or ACH. Make sure to review the current contribution limits if you’re considering this method. The IRS updates the limits each year.

Fund Your Entrust Account

And there you have it. Funding your SDIRA is as easy as transferring or rolling over your current retirement funds or making a contribution. Don’t have an account yet? We make it easy to open an SDIRA in about 10 minutes online, and our online portal makes managing your account a breeze. 

And as always, it’s a good idea to discuss any investments and changes to your accounts with a qualified financial expert. 

Transfers vs. Rollovers FAQs

What is the difference between a transfer and a rollover? 

A transfer is used to move funds from a single type of account between two institutions. A rollover involves moving funds from one type of account to another type of account. There are different tax implications for each of these funding options, so be sure to read the details above.

What is a rollover IRA? Is that a different kind of IRA?

A rollover IRA is not a special kind of IRA. When some firms use that term, they are referring to an IRA that is funded via a rollover. When you roll over funds from a 401(k) or other retirement plan into an IRA, you have funded an IRA via a rollover.

Is IRA to IRA a transfer?

As long as the process involves moving funds from the same type of IRA between institutions, then it is a transfer. For example, moving funds from one Roth IRA to another Roth IRA is a transfer. 

Are there limits on IRA transfers?

There are no limits on the number of transfers you can conduct in a given year. There is also no limit on the amount you can transfer in each transfer or the total amount you can transfer in a year. 

How often can you do a rollover?

All rollovers are subject to the same rule of one rollover in a 12-month period.

How do I report a rollover?

A rollover includes both a distribution and a rollover contribution. The distribution is when the money is taken out of the first account, and the contribution is when it is rolled into the new account. As the receiving institution, Entrust reports the rollover on IRS Form 5498. The distributing financial organization will then report the distribution on IRS Form 1099-R. 

You, the taxpayer, reports the distribution (1099-R amount) on line 4a of your IRS Form 1040. You should also write in the word “rollover” on line 4b of your 1040 if you rolled over the full amount.

What is a Roth conversion? Is it the same as a back door Roth? 

Sometimes a Roth conversion is called a “back door” Roth. A Roth conversion allows you to move funds from a traditional IRA or 401(k) into a Roth IRA. High-income earners who are not able to contribute directly to a Roth IRA often use it. When the funds are converted to a Roth IRA, you will owe taxes. Reach out to a tax professional or advisor to learn about your specific tax situation.