If you’re considering making a change to your retirement account — whether it’s because of a job loss, a new job, because you want to try a different investment platform, or some other reason — you may be surprised to learn there are important distinctions between performing an IRA transfer vs. rollover with your money.
Both terms are used to describe moving funds from one retirement account to another. But they aren’t interchangeable, particularly when it comes to the tax implications.
Key Points
• IRA transfers involve moving funds between identical account types at different institutions without tax implications or IRS reporting requirements.
• Rollovers can be direct or indirect, moving funds between different types of retirement accounts.
• Direct rollovers transfer funds directly between accounts and must be reported to the IRS, but are not taxed.
• Indirect rollovers involve the account holder receiving the funds, which must be redeposited within 60 days to avoid taxes and penalties.
• The IRS limits individuals to one indirect rollover per year, whereas there are no limits on the number of transfers.
What’s the Difference Between IRA Transfers and Rollovers?
The difference between an IRA transfer vs. rollover IRA is that transfers are used to move money between the same types of accounts at different institutions, while rollovers are used to move money from one type of account to a different kind of account.
How the Money is Moved
With a transfer, the money moves from one type of account into another account that is exactly the same — from a traditional IRA at one institution to another traditional IRA at another institution, for instance.
With a rollover, the money is moved from one type of account to another — from a 401(k) to an IRA, for example. There are two types of rollovers. With a direct rollover, the funds move directly from the old account to the new account. With an indirect rollover, the funds are sent to the account holder who then deposits them into the new account. The individual typically has 60 days to complete this process or else the IRS can tax the funds. Plus, if you are under age 59 ½, the money may be considered an early withdrawal, triggering a 10% penalty.
Taxes
With a transfer from one account to the exact same type of account, there are no taxes that need to be paid, and the transfer does not need to be reported to the IRS. However, if you transfer a traditional IRA to a Roth IRA, you must pay taxes on the traditional IRA before converting it to a Roth IRA.
There are no taxes to be paid with a direct rollover, but the rollover must be reported on your tax form. With an indirect rollover, unless the check the account holder receives for the funds is made payable to the new retirement account, the original retirement plan administrator is required by the IRS to withhold 20% for taxes.
Limits
The IRS allows only one indirect rollover per year. There is no limit of the number of transfers an individual can make.
Here is a quick comparison of the differences.
| Transfer | Rollover | |
|---|---|---|
| How the money is moved | From one account to another account that is exactly the same at another financial institution. | From one account directly to another account with a direct rollover. With an indirect rollover, the funds are sent to the account holder who deposits them into the new account. |
| Taxes | None and not required to report to IRS. | No taxes to be paid with a direct rollover, but it must be reported to the IRS. With an indirect rollover, if the check is not made out to the new retirement account, the original plan administrator must withhold 20% for taxes. |
| Limits | No limit on the number of transfers. | Only one indirect rollover is allowed per year. |
IRA Transfer Overview
A transfer occurs when an account holder moves funds between two retirement accounts that are the exact same type. For example, if a person moves a traditional IRA to another traditional IRA, or from an old Roth IRA to a new Roth IRA, that’s a transfer. It’s the most direct way to move funds from one tax-advantaged account to another.
Here’s how the process works: The money is sent from the old plan’s custodian to the new plan’s custodian. The account holder never touches the money, the transaction isn’t reported to the IRS, and there are no limits or restrictions, as long as it’s a change in the provider and not the account type. (Even though they sound the same, a saver can’t move funds from a traditional IRA to a Roth IRA without doing a Roth conversion.)
Recommended: Roth IRA vs Traditional IRA
IRA Rollover Overview
The term rollover is used when an account holder moves money between two different kinds of retirement plans: a 401(k) to a traditional IRA or SEP IRA, for instance, or a traditional IRA to an SEP IRA.
Things can get a bit more complicated with this process — partly because the IRS gets involved (unlike a transfer, a rollover must be reported on your income tax form), but also because there are two different types of rollovers. The way the process works depends on the type of rollover you do.
Direct
With a direct rollover, the funds are sent straight from the old provider to the new one. Much like a transfer, the account holder doesn’t ever see the money. But the original trustee or issuer is required to report this type of change to the IRS. That means account holders will receive a Form 1099-R, even though their money is going right back into another retirement plan, and they’ll have to report the transaction when they file their income taxes.
Indirect
With an indirect rollover (sometimes called a 60-day rollover), account holders take possession of their funds before moving the money into their new plan. They generally have 60 days to make a deposit into another account and complete the rollover, or the IRS can tax those funds.
And, if the account holder is younger than 59 ½ and doesn’t move the money to another account by that deadline, they also could face a 10% early withdrawal penalty. (If the account holder keeps a portion of the money and deposits the rest, the penalty and taxes are based on the amount they don’t roll over.)
That 60-day timeline isn’t the only thing that can make an indirect rollover more challenging. Unless the check the account holder receives is made payable to the new retirement account, the original retirement plan administrator is required by the IRS to withhold 20% for taxes. (An IRA distribution may be subject to 10% withholding.)
The IRS allows only one indirect rollover each year, no matter how many retirement accounts a saver might have. Just as with a direct rollover, the original trustee will report the transaction and issue a Form 1099-R.
The trustee performing the rollover also will send a Form 5498 with information individuals may use to report a rollover, but that form isn’t filed with the tax return; it’s for informational purposes.
Get a 1% IRA match on rollovers and contributions.
Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1
1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
Considerations When Choosing Between the Two
If the idea of doing a rollover to a traditional IRA is appealing, some online comparison shopping can help determine what different providers have to offer. This might include looking at:
• What types of investments will be available (stocks, bonds, mutual funds, exchange traded funds (ETFs), insurance products, etc.)?
• What kinds of fees and commissions are charged?
• How do savers access investing information in general, and access their account information specifically?
When deciding on whether to do a transfer or rollover to a new employer’s 401(k) plan, it may help to talk to someone in human resources. Some questions to ask might include:
• Will the new employer accept money from an old 401(k) plan? The new plan is not required to accept contributions from the former plan, so that may not be an option.
• How long must new employees wait before they can begin contributing to their plan? Some companies have a waiting period of six months or even a year.
• What’s the employer’s matching contribution?
• What is the vesting schedule? Even if employees can contribute their own money to the plan right away, they may have to wait a year or longer before they actually own the money the employer contributed to their account.
• What are the new plan’s investment options, fees, etc.?
If things are just too busy or unsettled to make a decision about an IRA transfer vs. rollover right away, waiting may be the right choice. Most plans allow former employees to leave the money in a 401(k) indefinitely (unless the amount saved is under a required minimum).
But former employees can no longer contribute to an old account, and they can’t take a loan from the account. And if they forget to open a new account elsewhere — or simply choose not to — they could miss out on months or even years of adding more money to their investment savings.
The Takeaway
For most people, a transfer may make the most sense when moving money from one retirement account to another. These trustee-to-trustee changeovers make it easier to avoid paying income taxes and an early withdrawal penalty. With an indirect rollover, there’s a greater chance of making a mistake that could result in owing money to the IRS. However, each individual will have to consider their own needs and goals when they decide how to handle this important decision.
If you’re leaving your job or reassessing your retirement plans, you may want to roll over your old 401(k) accounts to a rollover IRA. Or a worker who is remaining in their job may choose to open an IRA in addition to having a 401(k) with their employer to save even more for retirement. Individuals can contribute up to $6,500 to an IRA in 2023 (or $7,500 if they are 50 or older), on top of what they put into their 401(k) or other employer-sponsored retirement plan. In 2024, the contribution limit to an IRA is $7,000, or $8,000 for those 50 or older.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
Is it better to transfer or rollover IRA?
In general, a transfer may make the most sense for many people when moving money from one IRA to another similar IRA at another institution. It is typically the most direct way to move funds from one tax-advantaged account to another.
What’s the difference between reportable rollovers and non-reportable transfers?
When you do an IRA transfer and move funds from one IRA to the same type of IRA, you are not required to report the transfer to the IRS on your tax forms. However, an IRA rollover must be reported to the IRS.
What has more advantages: an IRA transfer or rollover?
It depends on the type of account you have. If you are moving an IRA to another similar IRA, a transfer may be the more straightforward and easier method and doesn’t need to be reported to the IRS. But if you are moving funds from a 401(k) to an IRA, a direct rollover may be the best option. The money will be sent straight from the old plan provider to the new one. You will need to report the rollover when you file your taxes.
Can you transfer or rollover all assets?
You can generally transfer or rollover all your assets if you choose to. However, with an indirect rollover, unless the check the account holder receives for the funds is made payable to the new retirement account, the original retirement plan administrator is required by the IRS to withhold 20% for taxes. Also, a required minimum distribution RMD) cannot be rolled over.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SoFi Invest®
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
SOIN0124011