Know the Difference: IRA Transfer vs. Rollover

In order to live comfortably during retirement, you’ll need to start saving as soon as you can. Opening an IRA account is widely known as one of the most reliable ways to invest in your future.

There are two major ways to fund your IRA: transfers and rollovers.

Not everyone understands the difference between the two, though. Not sure where to start? Don’t worry, we’ve got you covered.

Let’s take a look at everything you need to know about IRA transfer vs rollover.

An IRA Transfer

When you move money from one IRA account to another, it’s known as a transfer. The same concept applies as when you move money between two separate checking accounts at different banks.

When you move funds from an IRA at one firm to an IRA account managed by another firm, the transfer isn’t reported to the IRS and no taxes are incurred. This is due to the fact that the money in the original IRA account never actually reached the account owner.

If the owner were to instead withdraw the funds and then reinvest them into another account, they would incur taxes upon withdrawal. There may even be tax penalties depending on why the money was taken out of the account.

An IRA Rollover

A rollover occurs when money is either moved from an IRA account to a retirement plan or from a retirement plan to an IRA account. When the money never reaches the account holder, it’s known as a direct rollover.

This type of rollover differs from a conventional transfer because it involves two different types of plans.

Although direct rollovers are reported to the IRS, they generally aren’t taxable since the money was never made payable to the account holder.

During an indirect rollover, the money is distributed to the account holder. But, it isn’t taxed if the money is reinvested in an IRA account within 60 days. This will allow the account funds to remain tax-deferred.

How Should I Prepare For One?

Above all else, it’s important to understand that a rollover will likely take a couple of weeks to complete. This is crucial for those handling indirect rollovers to keep in mind, as penalties occur after 60 days from when the funds are distributed to the account holder.

Additionally, most institutions will require you to fill out paperwork in order to begin the process. Some providers may have specific requirements regarding rollovers that may become a factor when reallocating your funds.

Knowing The Difference Between IRA Transfer Vs Rollover Can Seem Difficult

But it doesn’t have to be.

With the above information about an IRA transfer vs rollover in mind, you’ll be well on your way toward putting money away toward a peaceful retirement.

Want to learn more about how we can help? Feel free to get in touch with us today to see what we can do.

Characteristics of the best IRA custodian

The internal revenue service (IRS) decree holds that Individual Retirement Accounts (IRAs) should have a custodian. The custodian is a financial institution that holds the account’s investments just for preservation. The custodian also ensures that all the government and IRS regulations are honored accordingly. While custodians are very easy to find, the problem is how to make the best choice. First, you have to decide the type of IRA you need and the type of investments you need to make with it. 

Traditional vs. Roth IRA 

Both accounts allow the money to grow free of income tax. The difference between the two is: 

  • In Traditional IRA, a tax deduction is made on the contributions from that year; this defers any tax payments until withdrawals are made years later. 
  • Whereas for Roth IRA, there is no tax break on the amount of money invested. In a nutshell, there are no taxes owed on the amount earned. 

Self-directed IRA

Whether Traditional or Roth, as an investor, you can choose to have your custodian manage the investments for you entirely or be self-directed. 

A self-directed IRA allows for expanded investment options. Although the name self-directed makes it seem like the owner has all the control, that’s not how it is. A Self-directed IRA will allow you to move away from the traditional publicly traded assets and utilize your money for alternative assets: Real Estate, Private companies. 

With this in mind, an investor, whether self-directed or not, would want to get the best custodian. 

The following are characteristics of the best IRA custodian. 

An Experienced Custodian – The best custodian for your self-directed IRA is a financial institution with significant experience in offering that service. Also, a custodian that focuses its efforts on providing self-directed IRA custodial services is more likely to serve your needs.  

Smooth Account Set-up – The process of setting up an IRA with a traditional custodian should be as brief and quick as setting up a self-directed IRA. Quest Trust Company, for example, provides easy downloads for new account information packages and forms on its website. 

Low-fees – Cost is one of the essential factors in business because it determines the total amount of profit expected. The most common fees for a custodian are the annual account maintenance fees, commissions, and loads for the mutual funds. All custodians do not charge the same. For example, maintenance fees are not a must. And if you are thinking of investing in mutual funds, it would be better to look for a custodian offering no-loads. 

Wide Selection – It would be best to have a more excellent variety of investment options, especially the individual stocks and bonds. 

Customer Service – It is imperative to have a knowledgeable person answering your calls and emails. It is very frustrating to receive incomplete or confusing information about your accounts. Therefore, while looking for a custodian, always vet the customer service. 

No Restrictions – As an investor, you must get a custodian that doesn’t limit your investment options. 

Education – Even if you are an experienced investor, you can benefit from an IRA custodian who provides you with educational opportunities. It would be wise to look for custodians who have relevant educational materials on their websites, such as in-person courses, live webinars, and overall educational resources.

Consolidation Savvy – For people having multiple IRA accounts, most custodians advise consolidation of the accounts into one single fund. Therefore it will be advisable to get a custodian who thoroughly understands the rules regarding consolidation.

After considering all of these characteristics, you should be able to make an informed decision about choosing the best custodian to help you set up and maintain your Self-directed IRA. 

At Quest Trust Company, we offer self-directed IRA accounts that place the customer at the heart of the decision-making process. Contact us today to discover how our expert staff can ease the administrative burden and help you to make the investment that is right for you.

What is a Self-Directed IRA?

Whether it’s a Traditional IRA or a Roth IRA, a Self-Directed IRA (SDIRA), gives you all the tax advantages of an IRA with the freedom and flexibility of a wider array of investment instruments. The opportunity to take control of your financial future with greater asset diversification is one reason to invest in a self-directed IRA.

  • Regular IRAs allow investments in stocks, bonds, mutual funds, ETFs, and CDs. 
  • With a self-directed IRA, your investment options increase to include real estate, tax lien certificates, private market securities, promissory notes, and other investment opportunities. 
  • Building wealth with the tax advantages of an IRA while diversifying your retirement investment fund allows you to seek higher returns than a regular IRA. 
  • Higher yields and less volatility are another advantage of an SDIRA.

There are restrictions on what is permissible within IRS guidelines for an SDIRA. 

  • For example, you cannot borrow money from your SDIRA, sell the property to it, or enter into deals with relatives for it. 
  • You should also know that your IRA custodian cannot provide investment advice. 
  • Your IRA custodian can and should advise you of all prohibited transactions for your SDIRA.

The annual contribution limits are the same as a regular IRA: for those below the age of 50, $6000, and those older than 50, $7000. With the current and future problems with pensions, health care, Social Security, and other government programs, it is more important than ever to have a solid foundation for your financial future.

Quest Trust Company IRA Specialists can answer your questions about an SDIRA. Consider the benefits of an SDIRA with Quest Trust Company as your custodian: 

  • While most companies have only one option for your SDIRA, Quest Trust Company offers seven. 
  • Quest, there is no minimum cash balance. 
  • Transaction processing can exceed over two weeks with some companies; Quest processes transactions within 24-48 hours.

Quest offers the following for FREE (Other companies charge a fee for all of the following items):

  1. Expedited Services
  2. Processing Incoming Wires
  3. Processing Incoming Checks
  4. Roth Conversions
  5. Re-Characterizations
  6. Change Account Type Fee
  7. Certified Mail Fee
  8. Paper Statement Fee
  9. Distribution Processing
  10. Required Minimum Cash Balance (No minimum cash balance)

Contact a Quest IRA Specialist today! And discover how a self-directed IRA will fit into your retirement investment strategy. At Quest Trust Company, we help you take control of your retirement. 

How to Maximize the Growth of Your Investment IRA

When starting to plan for retirement, it’s important to start looking into tools that will help make the financial transition into retirement go as smooth as possible. Most people who are looking into ways that they can simplify the retirement process usually turn to an Individual Retirement Account. These are accounts that can have annual contributions, which can be tax deductible. Investments are only taxed when they are withdrawn from the account, but they are taxed in the same way that a regular income is taxed. There are certainly ways that people can get more out of an IRA account, which we will explain below.

The Earlier, The Better

IRAs grow when money is compounded. Investments can usually create more returns by reinvesting. If you give your money more of a chance to go through the cycle of compounding, the better chances of success for your IRA will be. This will allow your money to go through the compounding cycle without the impact of taxes taking over. Read more about this topic in our post How to Save for Retirement in Your 20s, 40s, and 60s.

Don’t Wait Until Tax Day to Contribute

\Waiting until tax day is not a good idea. A lot of people who have IRAs only make contributions to their accounts when their taxes are done. Doing this denies the chance for your IRA to grow as much as possible over the course of the year. A contribution at the beginning of the year gives the IRA a longer time to compound. Instead of making one big contribution, experts recommend putting a small portion of your money into your account throughout the year because it will benefit you most in the future

Specialize by Using your IRA

It’s crucial to set investment goals. Having investment goals will help determine what goes into your account. Experts recommend funds that are trade exchanged because they have low expenses and the other fees aren’t as much as other accounts have proven to be if you’re looking into basic retirement plans. More advanced retirement plans have distribution across many different accounts based on the taxation, also known as an asset location. Bonds that earn an income should be invested into IRAs and other financial gains and assets should be put into accounts that can be taxed.

Not every strategy for stocks is something that can be considered beneficial. It doesn’t just depend on how much you get taxed from each account, but you also have to consider what your personal situation is at the time of investment and how much you are anticipating getting back from your investment. Assets that are considered inefficient are in favor of getting put into an IRA, but other funds, like index funds, should be put into an account that can be taxable. Lower-return funds don’t have a specific end location; they can go anywhere.

IRAs can also be used for way more than what you would expect. People often find themselves investing in many different specialized funds, such as foreign equities, real estate, or investments in stocks that are considered to be small-cap stocks. Speak to your financial advisor about the best course of action for you.

What is the Penalty for an Early Withdrawal from an IRA?

If you’re asking this question, then you’re most likely needing a financial boost and are wondering if your retirement funds are an option. While most financial advisors would recommend never touching your retirement funds unless in a true emergency, there are some circumstances where you may avoid penalty on an early withdrawal. Before discussing these, we will explain how an early withdrawal can hurt you more than just in penalties.

Penalties, Taxes, and Other Losses

If you take a distribution from your Traditional IRA before 59 ½ or take a distribution from your earnings in a Roth IRA before having the account for at least 5 years or age 59 ½, whichever comes later, then you will incur a 10% penalty on the distribution amount. So, if you take a $10,000 distribution, $1,000 will automatically go toward paying a penalty. Note, distributions on your Roth contributions are penalty-free at any time.  

Besides the 10% penalty, you will have to also pay taxes on the amount distributed from a Traditional IRA. Be careful because the distribution counts as taxable income, and it could bump you up to a higher tax bracket depending on the amount withdrawn. You may also have to pay income tax on distributions made from a Roth IRA under certain circumstances. We’ll cover these in more detail below.

If those two points aren’t enough to scare you into keeping your retirement money where it’s at, consider the compounded interest you will lose out on if you take a distribution before retirement. Using the $10,000 example, in just 10 short years with a 5% interest rate that money could have grown to nearly $16,500 without any additional contributions. In 20 years, the number reaches to $27,000.

Remember, distributions aren’t always easily replaceable. Both Traditional and Roth IRAs have contribution limits of $5,500 per year (or $6,500 if you’re are 50 or older). This means you will only be able to replace about half of your distribution in the $10,000 example by the end of the year, if you haven’t met the limit already.

Exceptions to the Early Withdrawal Penalty

Luckily, there are a few exceptions to the 10% penalties, but you still may owe taxes and lose out on the compounded interest on your distribution. You can avoid the penalty and the taxes for a Traditional IRA or a Roth IRA distribution if you have had the Roth IRA for 5 years or more and:

    • Are 59 ½
    • You have suffered permanent or total disability
    • You are using up to $10,000 in a first-time home purchase
  • You are inheriting the IRA from a deceased relative

You can avoid the penalty, but still owe taxes on a Traditional or Roth IRA if:

    • You are using the funds for a qualified education expense
    • You haven’t had the account for at least five years, but you meet one of the criteria from the previous list.
    • You are taking substantially equal distributions over a period of time
    • You are using the funds to pay a medical expense that exceeds 7.5% of your AGI
    • You are using the funds to pay for health insurance while unemployed.
  • You are a member of the military and are taking a qualified reservist distribution.

Two last points to keep in mind. Rollovers do not count as distributions as long as you complete the transfer within 60 days. For the 5-year Roth rule, each contribution includes its own time clock. So, the most you can distribute in earnings is whatever was earned from the funds from at least five years ago, if you are younger than 59 ½ that is.

What is a Backdoor IRA?

Roth IRAs are fantastic ways to grow your retirement tax-free and access contribution funds at any time. However, not everyone can contribute to one. The contribution limits on a Roth IRA vary based on income and marital status. The most someone can contribute to a Roth IRA is $5,500 per year (as of 2018). This limit starts to taper off the higher in income you go, and eventually reaches $0 when you earn too much to qualify for Roth contributions. As of right now, however, there is a loophole of sorts to these limits with what is called a “backdoor IRA”.

What is a Backdoor IRA?

If you earn too much to contribute to a Roth IRA, you can still contribute to a Traditional IRA, and then roll over the funds into a Roth IRA. There are no age limits or income limits on a rollover. Keep in mind, however, that recent changes to IRA laws bar anyone from recharacterizing their rollover back to a Traditional IRA once the transaction is complete. Rollovers are final, so proceed with caution.

Remember, Roth IRA contributions are made post-tax, so rolled over funds from a Traditional IRA that were made pre-tax will be subject to taxation that year. If your investments lose money, and with no option to recharacterize, you may not have enough funds to pay the taxes owed and be on the hook for the deficit.

What are the Benefits of a Backdoor IRA?

Now that congress has restructured the tax brackets, you may qualify for a lower tax bracket than you were previously. If so, this is a great time to roll over your funds into a Roth IRA, so you pay the lower taxes now. Congress can change tax brackets again in the future, so it’s wise to take advantage of the lower taxes if you can swing it.

Distributions upon retirement for a Traditional IRA are taxed at the tax bracket you qualify for at the time. If you believe you will be at a higher tax bracket at the time you need to take distributions from your Traditional IRA, then you may consider making a rollover to a Roth IRA. Roth IRAs don’t require any minimum distributions at a certain age, so you can keep growing your funds as long as you need. Roth IRAs also allow for distributions on contributed money at any age penalty-free. Having investments in a variety of accounts, including Roth IRAs, allows more flexibility in retirement and helps diversify your portfolio.

How to Do a Backdoor IRA Conversion

There are two methods for completing a backdoor IRA.

Method One: Convert your entire Traditional IRA into a Roth IRA.

Method Two: Sell shares from your Traditional IRA and transfer those funds into a Roth IRA.

Remember, this strategy is only beneficial if the taxes you will save outweigh the costs of the transfer, including any fees associated. Always consult your financial advisor before moving funds from a Traditional IRA into a Roth IRA.

Should You Open Up Multiple IRAs?

IRAs, or individual retirement accounts, are useful for many different reasons, especially if you are self-employed. There are many benefits that you can get from these retirement funds, and you are able to open up as many as you’d like. However, if you decide to open multiple accounts, it’s important to be aware of the pros and the cons. If you’re not sure why you’d need multiple accounts, these pros and cons might be good to look over and decide if maybe opening multiple accounts would be good for you.

The Basics

Before you decide whether or not multiple IRAs is a good idea for you, it is important to make sure you know about the tax benefits as well as the limitations of an IRA. Some points to remember about these accounts is that there is a maximum contribution amount allowed each year and having multiple accounts will not raise this amount. It is based off the combined contributions to all the accounts. However, this does not mean there are no other benefits that multiple IRAs could have.

The Pros

One of the most popular reasons people will invest in multiple different IRAs is because they have different assets that they want to invest that are allowed in on IRA but not another. This could include things like real estate and precious metals, which can only be invested in self-directed IRAs, or stocks and bonds, which can be invested in traditional IRAs.

Not only does having multiple accounts allow you to invest different options, but if you have different assets in different accounts then it is much easier to track how well each investment is doing. This helps make the evaluation of your retirement funds easier.

It also is helpful because then you can take advantage of both the traditional and the Roth IRA tax advantages. If you split whatever you were going to invest in one account, you can put half into the traditional IRA with tax deductions when you withdraw and half in the Roth IRA which has tax free earning and withdraws.

The Cons

 

Multiple accounts mean that you have more to pay attention to. You have to manage each account individually, so it is possible to miss something or make mistakes which can be more stressful if you are not detail oriented. It is possible to combine accounts so there is some flexibility if there are any changes.

Setting up multiple accounts also has an additional fee attached to it, so that is a cost to consider, although it is small. Along with this, there are minimum balance requirements for separate IRAs, so it is important to make sure you have enough to contribute to each account so that they are over the minimum balance. If you don’t have enough to contribute to both accounts, you’ll have to be willing to wait until you have the proper amount.

Whether you decide to open multiple accounts or not, the most important considerations are to educate yourself and ask your financial advisor any questions you may have before getting into new accounts.