There's more than one type of IRA, and each comes with its own rules and tax implications. The good news is that you can make informed decisions about your retirement planning strategy by learning the nuances of IRA transfers and rest assured that your savings are working for you.
Understanding IRA Accounts
An IRA is a tax-advantaged savings vehicle designed to help you accumulate funds for retirement. There are different types and various tax benefits and rules that make them different. It's important to know both the features and the requirements of each IRA type before you consider transferring between accounts or to another person entirely.
PensionBee offers traditional IRAs which allow for tax-deductible contributions and tax-deferred growth. Then you have Roth IRAs, which accept after-tax contributions and provide tax-free growth and withdrawals in retirement. SIMPLE IRAs are employer-sponsored retirement plans used by small businesses. Last, there are SEP IRAs which are designed for self-employed individuals or those who own businesses.
The Basics of IRA Transfers
During an IRA transfer, funds are moved from one IRA to another which allows you as the account holder to either consolidate your retirement savings or potentially access better investment options for your unique situation. You can initiate an IRA transfer in one of two ways; either through a direct transfer or a rollover.
- Direct Transfers (or trustee-to-trustee transfers) allow your funds to be moved directly between two financial institutions without you receiving access to the money. Having no access means you can avoid any additional tax implications. PensionBee can assist in direct rollovers into a PensionBee IRA.
- Indirect Rollovers place the funds with you so you can deposit them into a new IRA within 60 days, though there are taxes and penalties to pay if you don't deposit them in time. PensionBee does not offer indirect rollovers.
The Internal Revenue Service (IRS) has very specific regulations that govern these transfers and outline the rules that must be followed to avoid penalties. These include limitations on the frequency of rollovers as well as the requirement that funds have to be deposited into a similar type of account in order to maintain tax advantages.
Transfer Options
Direct Transfer (Trustee-to-Trustee Transfer)
A direct transfer (not to be confused with a direct rollover, which is when funds are moved from an employer-sponsored retirement plan to an IRA) is commonly used for moving funds between IRAs.
To start a direct transfer, contact your IRA provider. They will coordinate the transfer directly but sometimes it requires follow up. PensionBee offers direct transfers from your old provider to a PensionBee IRA account. All customers get access to a personal, US based account manager (we call them BeeKeepers) who help you navigate this process. Using this method you avoid tax implications as it isn't considered a taxable IRA distribution by the IRS. You also don't have any reporting requirements, so it's truly quite seamless.
Indirect Rollover
For an indirect IRA rollover, you'd request a distribution from your current retirement account, receive the funds (often in the form of a check with your name on it), and then deposit the full amount into another qualified retirement plan within 60 days.
It’s important to know that in some cases, your old provider will withhold 20% for taxes. You have to reinvest the entire amount (including the 20% potentially being withheld) within 60 days or you are liable for paying taxes on it. So, if you fail to adhere to the 60-day rule of reinvestment, tax consequences apply and the distribution would be treated as taxable income because it was not reinvested in a retirement account. Also, depending on your age, you could also face a 10% early withdrawal penalty if you're under the age of 59½.
Transferring an IRA to Another Person
Gifting IRA Funds
If you’d like to consider “gifting” IRA funds, it can be a generous gesture, but there are big implications. There are only two real options: either a withdrawal or naming them as a beneficiary.
If you simply withdraw funds and hand them to someone, the distribution is treated as taxable income by the IRS and you will owe taxes on the amount withdrawn. Plus, if you’re under 59 ½ you will also have to pay an early withdrawal penalty. Additionally, the receiver of the funds can't just add them to their existing IRA but would need to manage the funds in a new account.
The other option is to name a beneficiary to inherit your funds after your death.
Considerations
What Are the Tax Implications?
Early withdrawal penalties are perhaps the most significant consideration to make before completing an indirect IRA account transfer. If you're under the age of 59½ and you initiate an indirect IRA rollover but fail to deposit the funds within the 60-day window, you'll face a 10% penalty in addition to facing regular income tax payable on the amount withdrawn. Plus, distributions would count toward taxable income, potentially pushing you into a higher tax bracket when you file your tax return.
Steps to Execute an IRA Transfer
- Confirm Your Transfer Type. Determine whether you're transferring a traditional IRA or Roth IRA and decide if you want to do a direct transfer or indirect rollover. PensionBee offers traditional IRAs and direct transfers. You can reach us anytime for help.
- Gather Account Information. Collect all necessary details from your current IRA (account numbers, statements, and contact information for your current custodian) and details of the recipient's financial institution. Once you have this, PensionBee can do the rest for you - just let us know.
- Verify where the funds are going. Confirm there is an eligible IRA account to receive the funds. We are happy to explain our current plan offerings at PensionBee.
- Request the Transfer. Contact your current IRA custodian to initiate the transfer. If you’re doing a direct rollover / direct transfer to PensionBee, we can do this for you.
- Complete Required Paperwork. Complete any necessary forms required by both your and the recipient's financial institutions to authorize the transfer. PensionBee can make this simple for you
- Monitor the Transfer Process. Keep track of your transfer progress. Direct transfers usually take around five days. At PensionBee, your BeeKeeper will keep you up to date on the status. If you are doing an indirect transfer and you receive a check you'll have a 60-day window to deposit the funds into the recipient's IRA without penalty.
