An important financial planning activity is reviewing your financial plan to ensure that everything is on track to help you meet your financial goals. Life changes, market shifts, and any number of factors can cause plans to change.
One common change that investors make during their financial journeys is to move funds from one retirement account to another. Whether this move occurs for tax purposes, because of a change in employment, or for another reason, it’s important to consider how this change will be made: as a rollover or transfer.
Of course, if your situation involves moving retirement accounts from your former employer, you have a variety of options from which to choose. These include:
- Leave the money in your former employer’s plan, if permitted
- Roll over the assets to your new employer’s plan, if one is available and rollovers are permitted
- Roll over to an IRA
- Cash out the account value
Because of this, it’s important to understand the differences between transfers and rollovers, as well as the benefits and drawbacks of each. Today we’re going to explore these options to help you get a better understanding of how a rollover or transfer could impact your financial planning activities.
What is a Transfer?
A transfer involves transferring funds from one account to another. Generally, transfers move from one account of the same type to another, such as moving funds from a 401(k) plan at a previous employer to a 401(k) plan offered by your current employer.
More commonly, transfers are used to move funds from one IRA to another, since you can move funds between accounts without incurring a tax penalty. However, if you need to move funds from a Traditional IRA to a Roth IRA, you must perform a Roth conversion, and make the necessary adjustments when you file.
What is a Rollover?
A rollover occurs when you move funds from one type of account to another, such as from a 401(k) to an IRA, either directly or indirectly. During a direct rollover, funds move straight from Account A to Account B. During an indirect rollover, you take possession of funds for a period of time before putting them into the second account.
There are limits to the way that you conduct rollovers, especially indirect rollovers, and it’s important that you work with a financial professional to help you understand how your funds will move and how to make those moves without incurring tax penalties.
How to Choose between a Transfer and a Rollover
Sometimes, the account types or the transfer initiator will determine whether your account transition takes place as a transfer or a rollover. In these instances, your financial advisor or another party will inform you of how the move will operate.
When you have the option to choose between transfer or rollover, it’s important to consider the account types that you’re working with and the potential tax implications of each option. While there may not be direct penalties associated with transfers or rollovers, long-term impacts might make one a more favorable option than the other.
As always, when it comes to challenging financial questions, it’s a good idea to discuss the matter with your financial advisor for a personal recommendation that meets your unique needs. To learn more about financial planning, contact Puckett & Sturgill Financial Group today for a consultation!
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.