Retirement Account Transfer vs. Rollover

Managing your assets properly is critical at any point during your professional trajectory but becomes even more imperative as you reach retirement age. Among the critical attributes of a successfully developed retirement account are minimal taxation and tax deductions, diversified assets and investments and a quality and consistent return on investment from these assets.

Changing market demands or changing investor preferences (such as from risk-oriented to more conservative investments), may spur the decision to transition from one retirement account to another. Regardless of your motive, understanding the benefits and risk of retirement account transfer vs. rollover can help to ensure that your assets are properly protected and invested for your retirement.

Retirement Account Transfer

The simple definition of a retirement account transfer is that one retirement account is shifted to a similar account at another institution. Typical account transfers occur regarding Individual retirement accounts (IRA), such as the traditional and Roth IRAs, but can also involve other retirement accounts such as 401(k)s.

These accounts have their stipulations regarding when assets can be withdrawn, whether and to what assets can be liquidated without incurring penalties, and what the mandatory, minimum and maximum contributions are. The IRS does stipulate some criteria regarding how to properly conduct a transfer without incurring any penalties or additional taxation:

One loophole within the transfer process is regarding a simple IRA that allows a simple IRA to be transferred to a traditional IRA after the simple IRA has been activated for 2 years. A simple IRA is the retirement account that has been established to accommodate small businesses to facilitate employer and employee investment opportunities.

Retirement Account Rollover

Conversely, a retirement account rollover is where one type of retirement account, such as a traditional or Roth IRA, is transferred to a different type of account. There are different methods to complete the rollover process. The direct rollover is usually done form an employer IRA to a private IRA. So long as all funds go into the new IRA, nothing needs to be withheld for additional taxes. In an indirect rollover a distribution is requested of the original assets and a check is issued to the account holder.

The account holder then has 60 days to transfer the funds to a new account and must withhold 10% of this distribution as taxable income if withdrawn before the age of 59 1/2 traditional IRAs; for those who are transferring from 401(k), 403(b) and 457 (b) accounts, the distribution quantity is 20%. In general, rolling over IRA or retirement assets occurs after you have left your employer or in the event you are unemployed

Benefits of Transfers and Rollovers

Most investors transitioning accounts will choose either a transfer or a direct rollover for the simple reason that these transactions don’t require any taxation and potential loss of income. Indirect transfers most often occur because of job loss or a liquidation of assets if the account was below 5,000 dollars.

In such cases, an indirect transfer ends up being the most relevant and necessary means of ensuring that all assets are suitable reinvested in an appropriate account, however, because of the distribution that is paid to the account holder during the rollover process, a tax penalty is incurred.

Rolling over from a 401(k) to an IRA is advantageous as it allows a further diversification of assets, for example the acquisition of precious metals, as well as the further investment in stocks and bonds within an IRA that may be prohibited or inaccessible in an employer-managed 401(k).

For those looking to continue to expand their assets and investments, a direct rollover would be the best option. For those looking to conservatively invest their assets without penalty, a retirement account transfer is the most sensible option. Make sure to check out these 4 golden rules to consider before investing in a gold IRA.

While retirement accounts are a precious commodity, especially as one nears retirement, properly managing one’s account does not eliminate the possibility of transitioning from one account to another. The above comparisons will help to illuminate any of the disparities that seem to exist relative to retirement account transfer vs. rollover and ensure that you achieve the most from your savings.