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.

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. 

Self-Directed IRAs and the American Dream

If you asked a group of people what the American Dream was, you would probably receive a different answer from each person. However, the responses would probably revolve around the central themes of having enough resources to cut down on everyday stresses and/or having a family to share life with. What attracts much of the world’s immigrants to the United States is the hope of success and prosperity, or just the opportunity to increase the quality of one’s life. While some people get lucky and are born into success or were born at the right time to have economical success come a little easier, success and prosperity are mostly gained through working hard and using your resources wisely.

It’s pretty clear that how one goes about achieving the American Dream is far different than it was 50 years ago, or even 30 years ago. A college degree isn’t a guarantee for getting a better job, and even the housing market is prone to major crashes, as we all witnessed in 2008. While we could debate for years over what the best strategies are for success, what we do know is that generations entering the work force now are having to be much more adaptable and innovative to make the American Dream into their reality. Many of these young workers are disillusioned with traditional 9-5 company jobs and are turning toward entrepreneurship.

We have all heard of the phrase “It takes money to make money,” and for the large part, you will need some resources to launch a business of your own. Utilizing Self-Directed IRAs is one way to gather the required resources. Unlike conventional IRAs, which limit the kinds of investments investors can make, Self-Directed IRAs open up the possibilities of investment to nearly anything, including your small start-up. Self-Directed IRAs call these “private placements”, and some entrepreneurs rely on investors to invest on them through this avenue.

Keep in mind, you can’t invest your own retirement funds into your business idea, and neither can your family or close friends. However, a handful of smart investors who see value in your idea might just provide you with the funds necessary to see it come to life. Usually investors are keenly aware that Self-Directed IRAs are inherently riskier than the safer stocks, bonds, and mutual funds they are used to. However, they also understand that with greater risk often comes greater reward.

Investors in Self-Directed IRAs like to stick with what they know or in a single industry in order to stay well updated on trends and news. They will likely vet potential investment opportunities before putting their money anywhere, and the process can sometimes take months of intense study. After all, not only are business owners relying on investors for launch money, but the investors are relying on the business for retirement money. In the right situation, investments in Self-Directed IRAs can turn out to be a win-win for everyone where all players get the sweet satisfaction of the American Dream in the end.

What’s Changing with Self Directed IRAs?

While the Tax Cuts and Jobs Act threatened to make big changes with regard to retirement accounts, there were only a few small changes that actually made the final cut. Most of the investment rules and penalties stayed the same for the 2018 year. The changes that were made dealt with recharacterization rules, Roth account income limits, 401(k) contribution limits, Saver’s Credit income limits, and uses for 529 accounts.

Roth Recharacterizations

The biggest change in the Act was the limiting of plan recharacterizations. In the past, plan owners could convert their Traditional IRA to a Roth IRA as long as they qualified, and then revert back before the end of the year if they changed their mind. Sometimes assets lost value or the tax burden for the conversion ended up too much for the owner to bear, so they would convert their accounts back before the effects took place.

Plan owners will no longer be able to take advantage of this loophole starting with any Roth conversions made on or after January 1, 2018. For conversions that occurred prior to that date, plan owners may choose to recharacterize them back to a Traditional IRA on or before October 15, 2018.

Income Limits for Roth IRA

Income limits for Roth IRAs raised slightly for the 2018 year. New contribution limits are as follows:

To contribute toward a Roth IRA, you must earn less than the maximum income limit for your category. Single filers must earn below $135,000 to qualify, and maximum contribution levels phase out starting at $120,000 (these limits increased by $2,000). Couples filing jointly must earn less than $199,000 to qualify, and their maximum contribution amounts start phasing out at $189,000 (these limits increased by $3,000). Married filing separately must earn less than $10,000 to contribute anything, although phase out starts at $1 (there was no change in these limits).

Plan Contribution Limits

Annual contribution limits for 401(k), 403(b), and 457 plans increased by $500 for the 2018 year. So, savers can contribute up to $18,500 or $24,500 if they are 50-years-old or older. For Traditional and Roth IRAs, contribution limits stayed the same at $5,500 per year, or $6,500 for those 50 or older.

Saver’s Credit Income Limits

The Saver’s Credit applies to Traditional IRA contributions for savers earning less than the income limits imposed. You may claim a tax deduction on these contributions if you earned less than $73,000 as a single person (starts to phase out at $63,000), $121,000 for married couples filing jointly where the IRA contributor is covered by a work-related plan (starts to phase out at $101,000), $199,000 for married couples filing jointly where the IRA contributor is not covered by a work-related plan but the spouse is (starts to phase out at $189,000), or $10,000 for married taxpayer filing separately and covered by a work-related plan (starts to phase out at $1). You can also learn more about Bitcoin IRA Rollover at this website.

New Uses for 529 Plans

Parents and grandparents will be pleased that 529 plan funds, which traditionally have been set aside for college expenses, can now be used for K-12 expenses related to private, public, or religious schooling. There is a caveat, however. Plan owners can only use these funds for up to $10,000 in school-related expenses per year. Note that Coverdell ESAs had always allowed plan owners to use funds for K-12 schooling and there are no withdrawal limits. There are many more differences between 529s and Coverdell ESAs, however, so study these thoroughly before deciding on one or the other.

Self-Directed IRAs: Three Things You Should Know

Self-directed IRAs are just what they sound like—IRAs that you call all of the shots for. These accounts allow for investments with larger rewards, but you will only reap them if you know what you are doing. Self-directed IRAs are inherently riskier than accounts controlled by a plan manager. Since you are the one choosing the investments, not just picking from a list, you will need to contribute research and prior knowledge into the process in order to play smart. Read on to learn more about what you should know about Self-Directed IRAs before starting one of your own.

Knowledge is Power

Most people who utilize Self-Directed IRAs stick with what they know. If they have a background in technology, or know a lot about real estate, they can make wise choices with those investments. Gathering as much information as possible, keeping up on the latest news in the industry, and checking projections are all ways to make the most of your investments. Remember, there are some restrictions for Self-Directed IRAs that can cost you in penalties. Avoid these at all costs.

Going into an investment blind could end up costing you big time, and you don’t want to be too risky with your retirement! However, the bigger the risk, the bigger the reward most of the time. Just keep in mind, there’s risk and then there’s calculated risk. Stay on the calculated side to avoid big blunders.

One Misstep Can Cost You Thousands

Not only do you have to be aware of the risk and rewards of each investment, but you also need to understand the total price as well. Some investments carry with them an added tax burden that investors should calculate into the total cost of the investment before purchasing. Just because these investments do have tax consequences doesn’t mean you should automatically write them off, however. The rewards for some outweigh the costs, but it’s important to at least be aware of them before you get yourself into a situation you weren’t prepared for. Typically, Self-Directed IRAs have lower management costs, so don’t forget to calculate in that piece as well.

Investment Opportunities are Abundant

Most retirement accounts have a list of investments that plan owners can choose from. Sometimes these options are just what you are looking for, and other times not so much. Self-Directed IRAs offer more room for experimentation and opportunities. If you have kept up-to-date on trends in your industry and see an opportunity that could pay off big time, a Self-Directed IRA is one way to make that happen. You can also invest in real estate, gold, private businesses, and tax liens with a Self-Directed IRA, which you can’t do with typical IRAs. However, like with conventional IRA accounts, you can choose between Traditional, Roth, SEP, SIMPLE, Individual 401(k), etc. for your plan type.

If you would like to diversify your portfolio or invest in something specific, you can use a Self-Directed IRA to accomplish your goals. As long as you understand the investment and calculate your risk, these types of investments can pay off handsomely.

Investments That Aren’t Allowed in Self Directed IRAs

One of the major benefits of having a self-directed IRA is the wide array of investment options that become available to you. In normal IRAs your investment options are mostly limited to stocks, bonds, mutual funds and CDs. With self-directed IRAs, however, in addition to the traditional investment options, things like real estate, notes, private placements, and many other investments become available. However, there are still limitations to possible investments in order to stay within IRS guidelines. A few of the investments that are not allowed are covered below.

Collectible items are not permitted in IRAs for a few different reasons. Generally speaking, collectibles do not raise in value enough to become a benefit in retirement funds. The risk outweighs potential benefits. So, things like comic books, stamps, wine, antiques, and other popular collectible items are not considered reliable assets. In order to protect investors and their retirement funds, the IRS excludes these items from IRA investments.

Term life insurance is a cash value insurance which means you don’t actually earn anything from it. For this reason, it is not able to be invested in self-directed IRAs. They don’t hold any financial benefits, so they wouldn’t do anything to aid your retirement funds, which defeats the purpose of investing. Whole life insurance on the other hand is able to generate an income over the years. However, you would lose the tax-benefits that they already have by putting them in a self-directed IRA.

The home you’re living in is not allowed because, according to the IRS it becomes a conflict of interest. If you were to invest your own home you would basically be renting it to yourself. You’d lose several financial benefits that you get for owning your own residence, so financially it is better to leave it out of a self-directed IRA anyway. You are, however, allowed to invest in other real estate as it can raise in value for your retirement fund. This is a good option if you’re planning on buying a retirement house because you can invest it and rent it until you are ready to live in it after reaching retirement age.

Personal loans are a bit more complicated when it comes to self-directed IRAs. Loans from your IRA account work similarly to normal bank loans where interest and repayment schedules are concerned. However, the IRS does not allow loans to be made to people with whom you have a personal connection to, as it can pose a risk to your retirement account. This includes family members and close friends.

While these are some of the main investments to avoid in self-directed IRA, there are other investments that are more conditional that are important to be aware of. With investments like precious metals and derivative contracts, there are more stipulations that go into what can or cannot be invested. So, if you’re considering any of those options it’s important to do some additional research so you remain compliant with the IRS and don’t miss out on any of the tax-advantages that IRAs offer.

Self-Directed IRA Contribution Due Dates

Tax Day is April 17th this year, which means you have until that date to file your taxes and contribute to most retirement accounts. Even though 2017 has ended, it’s not too late to meet your contribution goals. Keep in mind that distributions must be made by December 31st of the year reporting (2017) to qualify. Traditional IRAs require minimum distributions for anyone 70.5 or older, and inherited IRAs may require certain distribution amounts regardless of your age.

If you need an extension for filing your taxes, extension requests must be submitted by April 17th as well. We do recommend that you file your taxes or request an extension before April 17th to ensure that paperwork is submitted correctly and there are no errors that could cause a delay. Let’s take a look at the due dates and contribution limits for each type of self-directed IRA.

Traditional IRA

For the 2017 tax year, the contribution deadline is April 17, 2018. The contribution limit for a Traditional IRA is $5,500, or $6,500 if age 50 or older. If you met the contribution limit before you filed taxes but have contributed more since January 1st, you can count these extra funds for the 2018 tax year. If you aren’t covered by a retirement plan from work, you can deduct your 2017 Traditional IRA contributions from your 2017 taxes.

Roth IRA

Just like with Traditional IRAs, the contribution limit and deadline are the same for a Roth IRA. There are income limitations for contribution eligibility, however, and you won’t be able to deduct your Roth IRA contributions from your taxes.

SEP and SIMPLE IRA

The contribution deadline for a SEP IRA is April 17, 2018 and is December 31, 2017/April 15, 2017 for a SIMPLE IRA. Employers are the only ones eligible to make a SEP IRA contribution, and they can only contribute up to 25% of the employee’s income or $54,000, whichever one is lower. Employees can contribute up to $12,500 (or $15,500 if 50 or older) to their SIMPLE IRA. Employees must make their contributions by December 31st, and the employer who is matching must make the matching contributions by April 15th.

401(k) and Solo(k)

The deadline for 401(k) and Solo(k) contributions is December 31st of the reporting year (2017). Plan owners can contribute up to $18,000 for the 2017 year, or $24,000 if 50 or older.

Health Savings Account (HSA)

The deadline for a 2017 HSA is April 17, 2018. For individuals, the annual contribution limit for 2017 is $3,400 ($4,400 for ages 55-65). Families can contribute up to $6,750 ($7,750 for ages 55-65). Those older than 65 must meet certain qualifications in order to contribute to an HSA.

Coverdell Educational Savings Account (CESA)

The 2017 contribution deadline for a CESA is April 17, 2018. These accounts have a contribution limit of $2,000 and hold income requirements to qualify. Many savers use these accounts to help cover higher education expenses for children or grandchildren and save their retirement plan money strictly for retirement expenses.

Beware of Prohibited Transactions with Self Directed IRAs

Self-directed IRAs can be a great retirement option for those looking for more options and flexibility with their funds. However, there are still several rules and regulations to follow when it comes to these types of IRAs, and breaking them can be costly. You may have to pay taxes or fees on your earnings, or your account could be entirely disqualified if the terms are breached. Since it’s you and you alone who’s responsible for protecting your retirement funds, you should learn about the various restrictions below before your hard-earned investment takes a dastardly hit.

  1. Property usage by a disqualified person. If you purchase a property with your self-directed IRA money, you can’t benefit from the property in any way, and neither can your family members. This means you can’t live in the property, use it as a vacation home, or rent it to family members. This applies to all types of property, from single family homes to office spaces.
  1. Receiving income from plan property. You can’t use your retirement investment as a present-day income strategy. For instance, you can’t purchase an apartment building with your retirement money and manage the building at the same time. You can’t collect personal checks for rent or receive any personal income from the property in any way besides appreciation through your retirement account.
  1. Benefitting from personal equity. The IRS prohibits plan owners from contributing personal funds to the property or performing manual labor on the building itself in order to increase their investment numbers. Manual labor, even if free, counts as sweat equity and is strictly forbidden. If you want to improve the property, you will have to use your plan funds in order to do so.
  1. Lending of money to the disqualified person. Another prohibited transaction is lending or gifting money to a family member (or yourself) from your plan. Again, this is directly benefitting you and your family, so it’s not allowed.
  1. Disqualified fiduciary. Since the people who help manage your plan receive an administrative fee for their services, usually a percentage of the earnings over time, the plan fiduciary cannot be a relative of yours or have any stock in the investment itself. For instance, the fiduciary can neither own 50% or more of the company you’re investing in, nor own 10% or more in shares of the company. Basically, if they directly benefit from your investment, they can’t be in charge of it.
  1. Using funds for loan security. Lastly, you won’t be able to use your investment funds as collateral for a loan if a disqualified person approves or confirms the consideration. If you plan on using your retirement funds in this way, consult a third-party to avoid penalties.

In short, steer clear of disqualified persons and don’t try double dipping on your earnings. As long as you think of your investment as only there to benefit you at retirement, you shouldn’t have many issues. For more information and advice on self-directed IRAs, talk to your personal financial advisor.

Terms Every Investor Needs to Know for Self-Directed IRAs

Just like any profession, the world of finance has its own special vocabulary. Those not familiar with the terms may find paperwork confusing or difficult to understand. If you’re setting up a self-directed IRA for the first time, you will want to familiarize yourself with the below terms as you will be seeing them a lot around here!

Administrator The person or company who performs all actions related to running the plan. It could be an employer, a third-party hired to oversee the plan, or a corporate executive.

AGI (Adjusted Gross Income) The total sum of income you took in over the year minus the deductions and other qualified adjustments that reduce the total amount. Income can include earnings from a job, self-employment, taxable interest and dividends, capital gains, rental income, and any other income not exempted from income tax. The deductions for determining AGI may include student loan interest and tuition payments, IRA contributions, and teacher expenses for the classroom. The Tax Bill has changed many deductions for the 2018 year, so it’s best to brush up on what you will qualify for this tax filing year and what may be disappearing for next year.

Beneficiary Someone who receives an inherited IRA designated by the plan owner. They can include spouses, children, or anyone else related or unrelated to the plan owner, as long as they were properly listed on the paperwork.

Contribution Funds given to the IRA or 401(k). There are annual contribution limits for both IRAs and 401(k)s.

Custodian Person who handles all of the fund transfers and/or transactions associated with the plan. They must be an approved member by the IRS.

Disqualified Person Certain transactions cannot be performed within an IRA to benefit a disqualified person. An example would be purchasing a relative’s home with your IRA funds. Disqualified people may include a spouse, parents, children, fiduciaries, corporations, and more.

Distribution Withdrawals made from the IRA. There are regulations determining when you are allowed to make penalty free distributions, and some IRA plans require minimum distributions once you reach a certain age, called RMDs.

Earnings The total amount of money in your IRA minus the contributions. It’s what the IRA has earned, or how much it’s grown by, over a given period of time.

Fiduciary A person in authority over the management or administration of your IRA, or one who provides professional advice as it relates to your IRA.

Inherited IRA An IRA given to a beneficiary of the account after the account holder has passed away. Inherited IRAs have different rules and regulations than Traditional and Roth IRAs.

In-Kind Contribution These contributions are in the form of assets that have been valued at a fair market price. The value must stay within the contribution limits for the account.

Leveraged Transactions Where the account holder uses borrowed funds for purchases with the IRA. Also known as Debt Financed Transactions.

Permitted Investments Any general investments allowed under your plan. Not all plans allow the same investments, such as Real Estate Investments.

Prohibited Transaction These include unacceptable investments per the plan guidelines, or transactions that benefit a disqualified person.

Qualified Plan Approved by the IRS to allow tax-free or tax-deferred funds for retirement income. These are typical IRA plans.

Rollover Transferring funds from one plan to another, such as from a Traditional IRA to a Roth IRA.

Spousal IRA The IRA of a spouse who generates no income, or who generates an income too low to meet the contribution limits for their IRA. The working spouse can contribute to the Spousal IRA as well as their own, effectively doubling annual retirement investments.

Trustee The person who controls the assets in the IRA.

Unrelated Business Taxable Income (UBTI) Income earned by a tax-exempt organization outside of the exempt business-related activities, minus any qualifying deductions.

Unrelated Debt Financed Income Tax (UDFI) The tax on funds gained from a debt financed transaction that exceed $1,000. For example, if you borrowed $4,000 for an investment, and the investment appreciated to $7,000, you would pay tax on the $3,000 it earned.