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With rollover advice being a key touchpoint in the Fiduciary Rule, investors are likely getting more information from their teams of professionals as a result. However, clients sometimes struggle to define what type of method they are utilizing to come over to our firm. Is it a rollover, and if so, which type? Or is a transfer? After all, what’s the difference between rollovers and transfers?
There are three ways in which retirement assets can be moved from one account to another: a 60-day, indirect rollover, a direct rollover and a transfer. Knowing the difference between both rollovers and transfers is essential.
Both rollovers and transfers are generally defined as a movement of funds from one retirement account to another. You might choose to rollover or transfer after changing jobs. Or you may choose to change or add investments and perhaps your current 401(k) won’t allow it. In fact, many 401(k) plans won’t allow alternative investments like private equity or real estate. Perhaps you prefer to consolidate investments into fewer accounts.
Many confuse a rollover, particularly a direct rollover, with a transfer. However, a rollover may involve two different types of plans. Conversely, a transfer must involve like accounts. This means you can only transfer a Roth IRA, for example, at Custodian A to a Roth IRA at Custodian B. Oftentimes the new custodian initiates the transfer on the client’s behalf, which is not the case with rollovers.
You have three options of moving retirement assets from one custodian to another:
- 60-day, indirect rollover: your current trustee or custodian distributes plan assets to you, and you then have 60 days to deposit the distribution into a new retirement plan (and can complete only one within a 12-month period)
- direct rollover: your current trustee or custodian directly transacts with your new trustee or custodian in the movement of funds from one retirement account to another, as you never actually receive the funds or have control of them
- transfer: your current trustee or custodian directly transacts with your new trustee or custodian, moving assets from one like account to another
The indirect rollover 60-day requirement does not apply to direct rollovers since you, the account holder, do not receive any funds. Direct rollovers also generally avoid potential tax ramifications related to distributions. Transfers also avoid these tax ramifications since assets aren’t payable to or distributed to the client.
Why would you choose one option over another? That’s for you and your team of professionals to decide. It may make sense for you to take a distribution, or you may prefer the releasing and receiving custodians transact directly.
Keep in mind that each of these methods has different rules. For instance, you can’t roll over required minimum distributions. Also, the IRS has clearly defined rules for which accounts can be rolled to or from other accounts. Understanding the differences is key to avoiding delays or errors with your account movement.
Please work with your advisor or tax professional to determine whether a rollover or transfer is right for you. If you need assistance rolling over or transferring to a Kingdom Trust account, contact us today.
And for more information on rollovers and transfers, read any of our articles below: