An individual retirement account (IRA) is a type of retirement plan that is provided by various financial institutions granting different tax advantages by Internal Revenue Service (IRS). Even though there is no limit on the number of IRAs that one can have, there are some limits as how much you can put into each account per year.
Since IRAs are part of the retirement plans, they are often sponsored by employers to increase retention rates. When an individual is near retirement or wants to change jobs, they also have to decide the fate of his IRA: i.e. whether to keep the same IRA plan or change it. There are two distinct ways to transfer funds in IRAs; IRA transfers and IRA rollovers.
A traditional IRA transfer is moving of the same retirement plan from one financial firm to another. Since it’s a simple movement of assets in between two entities where no assets are billed or distributed, they are not taxable.
IRA rollovers are bit different than transfers because they allow you to change your type of retirement plan. Most IRA rollovers are done when people switch jobs, but rollovers can also be done in other cases as well. Many people rollover their IRAs because they want to keep their assets tax-deferred.
What are the differences?
- In IRA transfers, the money is directly moved in no time from one IRA account to the other, while in IRA rollovers the account holder has up to 60 days to redeposit the money in another IRA.
- In IRA transfers, you are allowed to move money from one IRA to the other and to another as many times as you want. However, in IRA rollovers, the IRS restricts the account holders to perform only one rollover a year.
- In IRA transfers, the total amount of the transfer gets deposited from the old account to the new account without any tax withholdings. With rollovers, this is not the case because a percentage of the amount will be tax-withheld.
When to implement each of those transfers?
If you are more open to explore different investment plans, you should consider a rollover because it provides you with options for transferring your funds from one type of plan to the other. On top of that, you can hold onto your money for 60 days in an indirect rollover so if you are certain of any short-term investment plan then you can use this money to generate some extra profit.
But remember that if you fail to redeposit the full amount of money in 60 days then you will have to pay taxes and penalties on the amount.
On the other hand, traditional IRA transfers are convenient and safe which is the whole point of retirement plan for some people. With an IRA transfer, you can protect your retirement investment from income taxes and other penalties.
Having a sound retirement plan and savings is everyone’s right and you can have better prospects in the form of individual retirement accounts: just pick the right IRA transfer plan according to your needs.
Griffin Financial: The Trusted Financial Advisors in Anaheim Hills, CA
Let the Orange County financial advisors at Griffin Financial point you in the right direction. We understand the value of having a plan for your future, so give us a call at (714) 912-4764 to discuss your options.