A direct transfer of IRA funds to a brokerage account can be an attractive option for investors. This transaction type avoids the fees and delays associated with an IRA rollover. However, direct transfers do require an investor to pay tax on the funds that are transferred. Investors who expect to withdraw their money from their account or who do not anticipate holding their IRA funds for a long time may find an IRA rollover to be the better option.
Direct Transfer
A direct transfer is the simplest option. You inform the broker that you want to transfer all funds from your current IRA custodian to the custodian of your new IRA. The broker will transfer the money for you, and there’s no paperwork for you to fill out. Be careful with this option, though, as brokers might charge a transfer fee, which can run anywhere from $50 to $100.
IRA Rollover
If you’ve already got an IRA account from a previous employer, you can roll over those funds into your new employer’s plan. For instance, if your current employer offers a 401(k) plan and you’re eligible to join the plan, you can rollover any balances from your previous employer’s plan. The transfer process is simple. You will submit the required paperwork to your current employer’s plan administrator. The plan administrator will transfer the assets from your previous employer’s plan into your current employer’s plan.
IRA Account Types
- Roth: The Roth is funded with after-tax dollars, but distributions can be taken tax-free.
- Traditional: The Traditional is funded with pretax dollars, but distributions are subject to income taxes.
- SEP: This is an account set up for the benefit of several employees, like a 401(k).
- SIMPLE: This is an account set up for the benefit of several employees, like a 401(k).
Direct Rollover vs. Traditional IRA
Direct rollovers are a convenient and efficient way to put your 401(k) money into your IRA. If you leave your job, you can roll over your 401(k) funds into an IRA account without incurring any taxes or penalties. This direct rollover process does not require any paperwork or additional steps. Another choice you have is the traditional IRA rollover. However, this rollover process also requires several steps and requires you file paperwork with the IRS.
Rollover vs. Transfer
You can transfer your traditional IRA (or 401(k)) into an IRA at a bank or brokerage. A rollover is when you move assets from one retirement account to another. A transfer is a transaction whereby you receive a check from your old company and deposit it into your IRA account. With a rollover, you have control over your assets and can take money out of the account at any time. However, a rollover incurs a 10% tax penalty if you’re under age 59 1/2, and you have to pay taxes on the amount withdrawn, often in addition to any associated fees. The rollover process is relatively simple, but there’s often a waiting period while the paperwork is processed.
IRA Rollovers
If you prefer to roll your 401(k) into a traditional IRA, then the IRS requires that you transfer the money directly from the plan provider to the IRA custodian. Because the custodian is the actual owner of the account, the custodian is responsible for ensuring that you distribute the correct amount to the correct beneficiary.
The Bottom Line
Some IRA owners prefer to avoid commissions and rollover fees by directly transferring funds between accounts. On the other hand, others may be concerned with penalties for early withdrawal, particularly if transferring an IRA to a 401(k) plan.