How do IRA Transfers work?

1 min readLast updated January 5, 2024by Rachel Carey

From traditional to other retirement accounts, we take a closer look at IRA transfers to help you prepare for the future.

Summary:  

  • You can request IRA transfers between different account types. 

  • Transferring your IRA may have tax implications. 

  • A direct transfer is between the same account types. 

  • Transferring 401K to an IRA is a direct rollover. 

What are the rules & regulations of IRA transfers? 

There are a variety of rules and regulations that you must take into account when transferring money from one IRA to another. The most important rules and regulations to keep in mind include: 

  • Distribution transfer exceptions: You can transfer all distributions to a new account, except for the required minimum distribution as well as distribution of excess contributions and related earnings. 

  • Transfers must be deposited within 60 days: You must deposit the transfer in the new retirement account within 60 days. 

  • Transfer to most types of IRAs: You can transfer IRA money to most types of IRAs and other retirement accounts. 

  • No requirement to accept transfers: The law does not require your retirement plan to accept your transfer. 

  • Only one transfer per 12-month period: You can make only one transfer per 12-month period for all IRA accounts you own, except transfers to another IRA or in the case of trustee-to-trustee transfers. 

What are the different types of IRA transfers? 

When you open an IRA account to start saving for your retirement, you can choose from two different types of accounts, namely a traditional IRA or a Roth IRA.  

  • Traditional IRA 

A traditional IRA account sees you make contributions with pre-tax income, although you can make after-tax contributions as well. Your contributions are normally tax-deductible in the year you made them, up to a specific limit. In 2023, you can deduct up to $6,500 if you are under 50 and up to $7,500 if you are over 50.  

Any withdrawals you make after retiring will be taxed at your income tax rate at the time of withdrawal. If you make early withdrawals or if you liquidate your traditional IRA account, you will be taxed at the standard tax rate and charged a 10% penalty. Distributions of your after-tax contributions will not be taxed or subject to penalties. You can transfer a traditional IRA from one provider to another without cost.  

For example, if you have a $60,000 income and you contribute $6,000 to your account, your taxable income that year decreases to $54,000 if you qualify for a tax deduction. When you start withdrawing from that account at age 59½, you will need to pay income tax on those withdrawals. 

To make a direct transfer from one traditional IRA to another, start by collecting your current account information, as well as information from the receiving institution. Next, contact your financial institution and request a direct or trustee-to-trustee transfer, which will move your money electronically to avoid tax consequences. 

  • Roth IRA 

A Roth IRA account sees you make contributions with your after-tax income. Any withdrawals you make after you reach 59½ years of age are tax-free. If you make withdrawals before that age, you need to include them in your taxable income and possibly pay a 10% penalty fee. 

You can transfer your IRA Roth account from one provider to another IRA Roth account with another provider easily and without cost. However, transferring a traditional IRA to a Roth IRA has tax implications. You need to pay tax on the money before making the transfer. 

For example, you earn $100, which is taxed at a 25% tax rate. You pay $25 in taxes and contribute $75 to your Roth account. When you withdraw the money after you reach 59½ years of age, you will not pay tax on your withdrawals. 

If you want to transfer a traditional IRA to a Roth IRA at the same institution, contact your institution and ask them to convert your traditional account to a Roth account. The transfer amount is reported as taxable income. If you made after-tax contributions to your traditional IRA, the conversion process would be more complicated. It’s best to speak to a financial advisor about this process, that’s also known as a backdoor IRA Roth conversion. 

  • 401K to IRA 

A 401K plan usually is an employer-sponsored plan, although individual small business owners can also set them up. These plans offer tax advantages, and they also may offer matching employer contributions. 

If you join a 401K plan at work, you should be given the option of contributing a portion of your salary via payroll deductions. Contribution limits for the year determine your annual contributions. If employer contributions are part of the deal, your employer will match your contribution dollar-for-dollar, or they will match a percentage of your salary. 

Transferring your 401K to a Roth IRA is known as a rollover. People often do this after leaving their jobs. To do this, gather your Roth IRA provider’s information, contact your 401K plan administrator, and request a direct rollover from your 401K to your preferred Roth IRA.  

Another option is to make an indirect rollover. Your 401K plan provider will send you a check for the balance, which you must deposit into an IRA provider within 60 days to avoid tax consequences. You can do this once in a 12-month period. 

How do I maximize my retirement savings? 

Use these three tips to help you prepare for your retirement: 

  • Take Social Security into account: Remember to include the yearly amount you can expect to receive from Social Security when working out your retirement goals and how to save for them. 

  • Do your homework: Research various traditional and Roth IRA options to find the one that best meets your needs. 

  • Increase savings with a backdoor Roth IRA: Contribute to a traditional IRA if your current income is too high for a Roth IRA, and then convert the traditional IRA to a Roth IRA for tax-free withdrawals when you retire. 

Working with a financial advisor you can trust is the best way to start planning for your retirement. Whether you’re looking at savings and investment options or an IRA transfer, a financial advisor can offer the guidance you need. Get matched with an advisor here. 

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.