IRA Transfer: Definition, How It Works, IRS Tax Rules

What Is an IRA Transfer?

An IRA transfer refers to transferring money from an individual retirement account (IRA) to a different account. The money can be transferred to another type of retirement account, a brokerage account, or a bank account. As long as the money goes into another similar-type account and no distribution is made to you, the transfer does not incur a penalty or fee.

Understanding IRA Transfers

An IRA transfer can be made directly to another account, and IRA transfers can also involve the liquidation of funds for depositing capital in a new account. The Internal Revenue Service (IRS) has established IRA transfer rules.

IRA transfers can be simple when they are made between common types of accounts. An account holder can transfer a traditional IRA from one provider to another without any costs. The same is true with a Roth IRA, which can be transferred easily from one provider or plan administrator to another as long as the type of account is the same.

Traditional IRAs have the greatest tax implications if converted to a Roth or liquidated. Investors converting a traditional IRA to a Roth IRA must pay the income taxes associated with the traditional IRA before depositing funds in a Roth IRA. Investors making a liquidation from a traditional IRA to fund a brokerage account would also have to pay taxes. In-kind transfers may be accepted from one account to another, however, tax implications would still apply.

Special Considerations

Investors establish IRA accounts to save for retirement. Investors can choose from two basic types of IRA accounts: a traditional IRA or a Roth IRA. Investing via these two IRAs means different tax implications that can be an important consideration if an investor chooses to make an IRA transfer. All IRAs are designed to begin payouts at the age of 59½. Distributions taken prior to that by investors may incur early withdrawal penalties.

Traditional IRA

In a traditional IRA, investments are generally made with pre-tax income, though after-tax contributions are also allowed. Contributions to a traditional IRA are usually tax-deductible in the year of the contribution up to a certain limit.

For 2023, people under 50 can contribute up to $6,500, and those aged 50 and over can contribute up to $7,500 with the $1,000 catch-up contribution. For 2024, the contribution limits increase to $7,000 and $8,000 respectively.

Withdrawals are taxed at the account holder's income tax rate at the time of the withdrawal. Any early withdrawals or liquidations of a traditional IRA will be taxed at the standard tax rate plus incur a 10% penalty. Distributions of after-tax contributions are not taxed or subject to penalties.

Roth IRA 

In a Roth IRA, investments are made with after-tax dollars. Since investments are made post-tax, withdrawals are tax-free in retirement. However, if you're under age 59 1/2, your withdrawals will be includible in your taxable income and they may be subject to a 10% additional tax.

IRA Transfer Rules

When considering an IRA transfer, keep the following IRS rules in mind:

• All distributions may be transferred over, except the required minimum distribution (RMD) and any distribution of excess contributions and related earnings.
• The transfer must be deposited in the new account within 60 days.
• Only one transfer may be made per 12-month period. This applies to all IRA accounts you may own except trustee-to-trustee transfers or those to another IRA.
• Money can be transferred to most types of IRA and retirement accounts.
• Your retirement plan is not required to accept your transfer.

IRA Transfer vs. Rollover

Although the terms may be used interchangeably, an IRA transfer is not the same thing as an IRA rollover.

When you do an IRA transfer, you're effectively moving your money between two similar accounts, so from an IRA account into another. For instance, you may decide to move your IRA from Firm A to an IRA account with Firm B. In this case, the account type doesn't change but the institution that holds your account does.

A rollover, on the other hand, involves the movement of money from one account type to another. In this case, the funds are generally liquidated from the old account and deposited into another. A rollover can involve transferring some or all of the money in an account. Rollovers can be direct or indirect:

• A direct rollover involves the transfer of funds directly from one qualified account, such as a 401(k) to an IRA
• An indirect rollover involves paying funds directly to the employee from a qualified retirement account like an IRA before the funds are deposited into a different retirement account, such as a 401(k)
  

The Bottom Line

Investing and saving for retirement becomes a lot easier when you know the rules associated with your accounts. This includes knowing the process of transferring your money from an IRA. When you do an IRA transfer, you effectively move your money from an IRA into another account between two firms. Keep in mind that this is different from a rollover, which involves changing the account type or paying the account holder directly before the money is moved to another account.

Correction—Aug. 20, 2023: A previous version of this article incorrectly stated that only one IRA transfer could be made per 12-month period in all cases.