Understanding Rollovers and Transfers: What’s the Difference?

When you're moving money between retirement accounts, the type of transaction you choose can have a significant impact on taxes, timing, and your overall strategy. Here’s a clear breakdown of the three most common ways to move retirement funds: Indirect Rollovers, Direct Rollovers, and IRA-to-IRA Transfers.

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1. Indirect Rollover (Also Known as a 60-Day Rollover)

How it works:

With an indirect rollover, you receive a distribution (typically a check) from your current retirement account—such as a 401(k) or an IRA—and it’s your responsibility to deposit those funds into a new IRA within 60 calendar days.

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Things to watch out for:

• Strict Deadline: If you don’t redeposit the full amount into another IRA within 60 days, the IRS considers it a withdrawal. That means it’s subject to taxes—and possibly a 10% early withdrawal penalty if you’re under age 59½.
  
• Tax Withholding: Employer-sponsored plans like 401(k)s are required to withhold 20% for federal taxes. That means if you want to roll over the full amount, you’ll need to come up with the withheld portion from another source.
  
• One-Rollover Rule: You can only do one 60-day rollover every 12 months, and that limit applies to all of your IRAs combined.

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Best for: Situations where you briefly need access to funds (but be cautious!).

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2. Direct Rollover

How it works:

With a direct rollover, your funds move directly from a retirement plan like a 401(k) into an IRA. You never take possession of the money.

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Why it’s safer:

• The check is made out to the receiving IRA custodian for your benefit (e.g., “Fidelity FBO John Smith IRA”), which helps avoid tax reporting issues.
  
• No 20% withholding or early withdrawal penalties apply.
  
• This method does not count toward the one-rollover-per-year limit.

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Best for: Moving funds from an employer plan to an IRA cleanly, efficiently, and without tax headaches.

Fun fact: have you checked all your old employers to make sure you don't have retirement accounts sitting there not being utilized?

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3. IRA-to-IRA Transfer (Trustee-to-Trustee Transfer)

How it works:

This is the most seamless and IRS-preferred way to move funds between IRAs. The money goes directly from one custodian to another, and you never touch it.

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Why it’s the safest option:

• No taxes withheld.
  
• No 60-day deadline to worry about.
  
• Unlimited frequency: You can do as many IRA-to-IRA transfers as you'd like each year.
  
• Most commonly used method for IRA-to-IRA movements.
  
• At the time of this blog being posted, Mountain West IRA is offering free incoming wire transfer fees over any incoming wire $25,000 or over.

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Best for: Consolidating IRAs or changing custodians without triggering taxes or penalties.

Reminder: We do our best to transfer this as fast as possible, however we are still depending on the sending custodian. We may ask for your help to contact them to speed up the process!

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Final Thoughts

Choosing the right method to move your retirement funds is critical to maintaining tax-advantaged growth and avoiding unnecessary penalties. And always consider consulting a qualified tax advisor or retirement specialist to ensure your rollover or transfer strategy aligns with your financial goals.

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Ready to take control of your retirement strategy?

At Mountain West IRA, we specialize in Self-Directed IRAs that give you the power to invest beyond the stock market—into real estate, private loans, precious metals, and more. Whether you're considering a Traditional or Roth IRA, we can help you understand your options and answer any questions you may have.

📞 Call us at 866-377-3311 or
📅 Schedule a free consultation today to get started!