You might be familiar with the words “Rollovers” and “Transfer” if you have been planning to save for your retirement. These are how you get the funds in your IRA.
Many people, not from the financial industry, are unable to distinguish these terms, even though these are quite different. In this article, we will try to clear out the differences between these terms.
What are Rollovers?
There are two types of rollovers, namely direct and indirect. For the direct rollover, funds are sent directly from one provider to another, and you will not be able to see it unless it hits your new account. On the other hand, indirect rollover is when you possess the funds before putting them back to the IRA within 60 days. There are rollover fees for the whole process. You can perform indirect rollover only once in 12 months, irrespective of the number of accounts you have. For a given tax year in which the rollover is taking place, you will receive 1099R from the company you are moving funds and 5498 from IRA Resource.
What are Transfers?
The most basic way to move funds from one IRA to another is through IRA transfer. The funds in this process move directly from one IRA provider to the other, and the same is reported to the IRS. There are no limits to the number transfers in a given time. If you have a traditional IRA account, you cannot transfer funds to Roth IRA, so go for a Roth Conversion before the transfer.
Which one to choose for moving retirement funds?
Let us find out the pros and cons of transfers and rollovers to help you choose between them when it comes to moving your retirement funds. The factors that might influence your decision will include your current plan, the account you want to open, and your purpose of using the funds after their arrival.
Pros: They are usually faster than transfers, and you can also hold the funds for 60 days (in case of indirect rollovers) before rolling them back to the IRA.
Cons: There is a limitation in the number of indirect rollovers, which is only one in 12 months. So in case any problem occurs, you will not be able to opt for another rollover for the next 12 months, which can be quite inconvenient.
Pros: You can do unlimited transfers per year without any worries. The process is easy and hassle-free.
Cons: The process is a bit slow compared to rollovers. You will also have to depend on your old company for the transfer, as they will do it on their own time.
With this comparative knowledge, you will certainly be able to make an informed decision, depending on your investment strategy. It is about your retirement funds and savings, so take some time, consult the experts, and then decide based on your research. A financial professional will help you make the correct choice here, so find an experienced person who is trained in this field.