Transfers and Rollovers

So why in the world would someone want a Traditional IRA if they already have a plan at work? It seems very limited in comparison. Well, twenty years ago that would see true. Many folks worked at the same job their whole career. However, as the economy changed so did the concept of a career. Now it’s not uncommon for people to change jobs every five years. While each new company may have a retirement plan to invest in, when you leave you need a place to put your money. Many folks are not very keen on leaving their retirement money with a company they no longer work with. Ergo, the Traditional IRA comes into play.

Remember, to avoid pay taxes in the here and now, the retirement money needs to stay in an IRS-approved retirement account. Thus many people transfer their 401k or similar to their Traditional IRA account. This is the one exception that allows in essence a deposit higher than the annual deposit cap.
Depending on the employer plan where the money is coming from, you can continue to defer taxes by “rolling over” your retirement money to a Traditional IRA. The IRS rules are met, and your company doesn’t have a stake since the money was already deposited with a third party (this was a key component of 401k protections since previously companies going bad would raid their employees’ pension accounts for needed cash before going belly up).

The main difference between the “transfer” and “rollover” is whom you give the instructions to when initiating the change. The rollover requires you to instruct your employer administrator of the desired change. The transfer is put into play when you have the financial institution getting the money ask for it to be transferred.

A transfer will usually occur after the money is already outside of your former employer plan. Let’s say you have it in an IRA with a broker. Then you decide it might be more prudent to now have your money in a bank with CDs. You have your bank initiate a transfer requesting the monies from your stock IRA be moved to your bank IRA and put in CDs.

The money moved in either instance is done via a check between institutions. You’re also allowed to move money in a rollover through yourself. You are basically allowed 60 days to mak this happen. In this case you’re given a check from your employer plan. You then deposit the check and amount in a Traditional IRA within the time window. Failure to do so will automatically treat your money as a distribution and then you incur income taxes in that tax year. It will happen because rollovers are required to be reported to the IRS. You’re allowed this kind of a move once every 12 months with the same pot of money.