Transfer or rollover are the two methods by which an individual can move assets between IRAs of the same type (i.e., traditional IRA to another traditional IRA or a Roth IRA to another Roth IRA). A common thread these transactions share is that if handled properly, IRA assets will retain their tax-deferred status when moved from one IRA custodian/trustee to another. On a side note, simplified employee pension (SEP) contributions are made to traditional IRAs, so essentially these deposits fall into the “traditional IRA-to-traditional IRA” movement of assets. Furthermore, from an IRA-to-IRA transfer or rollover perspective, a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA can be moved via transfer or rollover to another SIMPLE IRA before the SIMPLE plan participant/SIMPLE IRA owner meets two years of participation, and to another SIMPLE IRA or a traditional IRA after two years of participation is met.
IRA-to-IRA transfer
An IRA-to-IRA transfer is the direct movement of assets between “like” IRAs. If done by check (versus electronically), the check is made payable to the receiving organization as custodian (if the receiving organization acts as a custodian) or trustee (if the receiving organization serves as a trustee) for the individual’s traditional (or Roth) IRA, depending on the request. Per IRS Revenue Ruling 78-406, a transfer is a nonreportable movement of IRA assets since the IRA owner may not have “control” of the assets (i.e., the transfer is only negotiable as a deposit to the receiving IRA). There is no IRS reporting when completing an IRA-to-IRA transfer correctly.
IRA-to-IRA rollover
In addition to moving assets between “like” IRAs via transfer, an IRA owner can move assets using the rollover process. However, the difference here is that the IRA owner has control of the assets. In this case, the process begins with an IRA owner requesting a distribution by completing an acceptable distribution request form or following some other custodian/trustee-approved process. Upon receiving assets from an IRA, the IRA owner generally has 60 days to redeposit a portion of, or all, the assets to the same IRA or another IRA of the same type. Doing so will avoid any income tax that would otherwise have applied to the distribution amount. An individual is limited to rolling over only one IRA distribution during a one-year (i.e., 12-month) period. The “one per-year” rollover rule takes all IRAs (traditional, Roth, SEP, and SIMPLE) owned by an individual into consideration when determining eligibility. In other words, a distribution from any IRA that is later rolled over disallows any other IRA distributions taken within a “one-year period” from being rolled over. The rollover process is reportable to both the IRS and the IRA owner. This includes the distribution and the amount of the rollover contribution.
Keep in mind that the above information only addresses moving assets between IRAs of the same type. Subscribers to the Wolters Kluwer IRA Library (including the IRA e-book) or on-demand IRA training can learn more about recharacterizing IRA regular contributions (i.e., traditional IRA to Roth IRA or Roth IRA to traditional IRA), converting traditional or SIMPLE IRA assets to a Roth IRA, and moving assets between employer plans and IRAs by referencing those materials.