How a Direct IRA Transfer Works: A Complete Guide - SmartAsset (2024)

If you want to move your individual retirement account (IRA) balance from one provider to another, simply call the current provider and request a “trustee-to-trustee” transfer. This moves money directly from one financial institution to another, and it won’t trigger taxes. However, you must follow some rules in order to do it right. We’ll walk you through the direct IRA transfer process. To make sure you’re moving your savings to the right place, consult afinancial advisorwho can carefully analyze your individual situation.

IRA to IRA Transfer

The easiest types of transfers you can initiate in the retirement plan world are the ones involving the same type of account. So say you opened a traditional IRA with one financial institution, but you found a better option with another financial institution. Maybe they charge lower fees or provide better fund options.

The first step is gathering your current account information. So collect passwords, account numbers, statements and other materials. You should also gather information from the receiving financial entity such as their main address. You may need this when you contact your financial institution and request a trustee-to-trustee transfer or direct transfer. This ensures your money moves electronically from one financial institution to another without ever reaching your hands. As a result, you avoid tax consequences.

Otherwise, the bank or other entity may send you a check for the current balance, possibly triggering tax consequences. To avoid owing taxes and being penalized (if you’re younger than 59.5 years old), you must deposit the check in a different IRA account within 60 days of the check’s issue date. If you miss the time window, the IRS considers the amount sent to you as a distribution.

IRA to Roth IRA Conversion

People who want to transfer their IRAs are often converting their IRA account to a Roth IRA. If you’re sticking with the same financial institution, you can simply contact it and request a conversion. However, the transfer amount will be reported as income, which you’ll have to pay taxes on.

Of course, this assumes that you funded your traditional IRA entirely with pre-tax money. It’s possible, though, to make after-tax contributions to a traditional IRA. This is known as a non-deductible IRA. In this case, you may not owe taxes when you convert it to a Roth IRA if you’ve had no gains. Or you’d owe taxes only on the gains and on the portion of your balance funded with pre-tax money. But the process also known as a backdoor Roth IRA conversion can be complex. We recommend you consult a qualified financial advisor when considering this move.

If the conversion tax seems too big to take on all at once, you can move your IRA balance into a Roth IRA in portions each year. That said, the Tax Cuts and Jobs Act (TCJA) reduced the tax rates for many Americans to major lows. They are scheduled to expire in 2025 or even sooner if political action scales it back, so you may want to convert as much as you can each year.

The Trump tax planalso changed who is eligible for IRA conversion. In the past, you couldn’t change a traditional IRA to a Roth IRA if your income exceeded $100,000. But the new tax law eliminated this restriction. Again, Congress may change this, so you’ll want to take advantage of your eligibility while you can.

401(k) to IRA Direct Rollover

Another kind of IRA transfer, which is technically called a rollover, is when you move your 401(k) balance to an IRA. Typically, you’d do this after leaving a job.You can do so by contacting your 401(k) plan administrator and requesting a direct rollover from your 401(k) into an IRA of your choice. By using this specific language, you’re avoiding the same tax consequences mentioned above.

As mentioned before, in the retirement plan world, “rollovers” and “transfers” are actually different. The IRS generally defines a rollover as a movement of funds from a qualified plan that’s not an IRA, such as a 401(k), directly into an IRA. The process simply involves different paperwork, because you must report the move to the IRS.

In addition, you can perform an indirect rollover. In this case, your 401(k) plan provider sends you a check for your balance. You then have 60 days to deposit it into an IRA provider, or face tax consequences. The IRS permits you to perform indirect rollovers once every 12 months.

One exception to the IRS regulations is if your account has less than $1,000. If so, your employer will most likely close the account and send you a check for the total balance. This check will have already subtracted income taxes. However, the IRS will not impose its early withdrawal penalty if you deposit the money into anotherqualified retirement accountwithin 60 days. If you don’t, the government will tax the money to the fullest extent: as income and as an early withdrawal if you are younger than 59 and a half.

Bottom Line

The simplest kind of IRA transfer is trustee to trustee or what’s called a direct transfer. The involved financial institutions move the money between each other. You can request a direct transfer from IRA to IRA account or IRA to Roth IRA account. To move funds from a 401(k) to an IRA, request a direct rollover. Again, the involved providers will shift the money between each other. By making a direct rollover or direct transfer from IRA to IRA account, you avoid triggering taxes. Before moving large balances or making other complex retirement planning decisions, though, you may be better off consulting afinancial advisor first.

Retirement Tips

• Afinancial advisor matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,get started now.
• If you’re thinking about moving your IRA, take a look at our studies on the best IRA and best Roth IRA plans out there.
• In addition to the money in your IRA, you should also account for Social Security. To find out how much you can expect to receive from the government each year, use our Social Security calculator.

Photo credit: ©iStock.com/jxfzsy,/©iStock.com/designer491, ©iStock.com/ygallery