Difference Between Rollover and Transfer

Rollover vs Transfer
 

An IRA or Individual Retirement Account allows an individual to contribute funds towards their retirement and is held by a financial institution, which is known as the custodian. Rollover and transfer are two ways in which the movement of funds to or from an IRA can be done. Despite the fact that both allow you to move your funds to another IRA, there are a number of differences between the two. The article explains each transaction type and highlights the similarities and differences between IRA rollover and transfer.

What is IRA Rollover?

When you opt to rollover your funds held in an IRA, the funds that are to be moved will be paid directly to you and then you will be able to deposit these funds into another retirement plan. However, this movement of funds needs to be completed within a strict timeline of 60 days. In the event that the movements of funds are not completed within 60 days, the money will be treated as a withdrawal and will be taxed. Also, if you are less than 59 and ½ years old then you will be charged 10% penalty for early withdrawal.

Another restriction in rollovers is that it is possible for a person to do only one rollover for a period of 12 months. One of the disadvantages of rollovers is that 20% of the funds is withheld for the payment of taxes, in case the rollover is not completed.

What is IRA Transfer?

In a transfer, the custodian of the IRA directly transfers the funds in the account to the designated custodian, and you do not need to handle any of the funds transferred. One of the main advantages of a transfer is that they are convenient and one of the easiest way to move funds to and from an IRA. As the funds directly move between one to another custodian, you do not need to worry about meeting the 60 day timeline. There are also no restrictions on the number of transfers that can be made within a period of 12 months. One of the main advantages of transfers is that the total amount of funds is transferred to the new account without any percentage being held for the payment of taxes.

Transfer vs Rollover

Rollover and transfers are both means with which funds are transferred to and from IRAs to other retirement plans. Transfers are one of the easiest methods to move funds to and from an IRA. On the other hand, in a rollover, the funds that are to be moved are paid directly to you and then you deposit these funds into another retirement plan. Transfers are mostly preferred as opposed to rollovers as transfers are not subject to the same stringent regulations as rollovers. Transfers can be done any number of times within a year; however, rollovers can only be done once in every 12 months.

Another major difference is that in a rollover the initial custodian withholds 20% of the funds for the payment of taxes. However, as with a transfer, funds are not withheld for the payment of taxes and the total amount is moved to the new account. While a rollover has a timeline of 60 days, a transfer is done directly among custodians, and you do not need to worry about meeting the 60 day timeline. One main disadvantage of a rollover is that in the event that the movements of funds are not completed within 60 days, the money will be treated as a withdrawal and will be taxed.

What is the difference between IRA Transfer and Rollover?

• Rollover and transfer are two ways in which the movement of funds to and IRA or from an IRA can be done.

• When you opt to rollover your funds held in an IRA, the funds that are to be moved are paid directly to you and then you can deposit these funds into another retirement plan.

• In a transfer, the custodian of the IRA directly transfers the funds in the account to the designated custodian, and you do not need to handle any of the funds transferred.