Eligible Transfer

DEFINITION of 'Eligible Transfer '

An IRS-allowed movement of assets into or out of an individual retirement account and into another type of qualifying account. Eligible transfers allow retirement plan holders to move assets in a way that often does not incur income-tax liability and that avoids early withdrawal penalties. Because IRAs have tax advantages, the Internal Revenue Service has strict rules about how and when account holders can add or remove assets from them. The three main categories of eligible transfers are transfers from one trustee to another, rollovers and transfers necessitated by divorce.

BREAKING DOWN 'Eligible Transfer '

As an example of an eligible transfer from one trustee to another, an IRA account holder can move IRA funds to a health savings account on a one-time basis without incurring tax liability or penalties. An eligible IRA to FSA transfer helps account holders pay for large medical expenses, subject to annual HSA contribution limits. The IRA custodian will move the funds directly from the IRA to the HSA in what is called a “direct transfer” because if the IRA owner receives the proceeds, the transfer will be ineligible.

One of the most common types of eligible transfers is the rollover of retirement plan assets from an employer-sponsored plan to an individual retirement account. When an individual changes jobs, if they do not want to leave their retirement plan assets in their former employer’s retirement plan or if they do not meet the requirements to do so (such as having an account balance of at least $5,000), an eligible transfer makes it possible to keep money saved for retirement rather than simply closing the old retirement account and paying an early withdrawal penalty. Another benefit of doing an eligible transfer is not losing the opportunity to save those assets for retirement, which is important because retirement plans have annual contribution limits.

In the case of divorce, if the separation requires that a former spouse receive a distribution from a qualified retirement plan, an eligible transfer makes it possible to roll over assets into a new retirement account without creating a taxable event. 

RELATED TERMS
  1. IRA Transfer

    The transfer of funds from an Individual Retirement Account (IRA) ...
  2. IRS Publication 590: Individual ...

    A document published by the Internal Revenue Service (IRS) that ...
  3. IRA Plan

    A plan that individuals may establish to arrange and plan for ...
  4. Indirect Rollover

    A method of transferring assets from a tax-deferred 401(k) plan ...
  5. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
  6. Extended IRA

    An IRA that allows a second generation beneficiary to continue ...
Related Articles
  1. Retirement

    Divorcing? The Right Way to Split Retirement Plans

    Mishandling how you define and allocate retirement-plan assets in a divorce can cost you plenty in taxes and aggravation. Here's how to do it right.
  2. Retirement

    IRA Assets And Alternative Investments

    Interested in non-traditional investing? Make sure you follow the rules to avoid prohibited transactions.
  3. Retirement

    5 Investments You Can't Hold In An IRA/Qualified Plan

    The list of prohibited investment vehicles is short, but it's important to know what is off limits.
  4. Retirement

    Divorce Over 50: Seven Mistakes to Avoid

    With longer lives and women's greater financial independence, divorces at 50+ are soaring. How to avoid money trouble when you sever ties with your spouse.
  5. Retirement

    Avoid Taxes on IRA Rollovers

    For years, IRA owners have been allowed to roll over their money from one IRA to another once a year without penalty, for each IRA account they had. A tax court ruling in January 2014 has brought ...
  6. Taxes

    Tax Treatment Of Ineligible IRA Rollovers

    Eager to save for retirement? Learn how to avoid overpayment penalties.
  7. Taxes

    Avoiding "Prohibited Transactions" In Your IRA

    To avoid jeopardizing your IRA assets, find out what transactions are prohibited.
  8. Taxes

    Avoiding IRS Penalties On Your IRA Assets

    The best way to avoid additional charges and taxes is to know which transactions have expensive consequences.
  9. Options & Futures

    Know The Rules For Roth 401(k) Rollovers

    Rolling a Roth 401(k) into a Roth IRA is usually the optimal thing to do.
  10. Your Clients

    Tips for Making Your Nest Egg Last Longer

    If you’re trying to figure out how to make your hard-earned nest egg last, there’s one piece of advice that stands above the rest.
RELATED FAQS
  1. My company is the trustee of our 401k plan (which has 112 participants). What are ...

    The answer may vary depending on the plan provider and the provisions of the plan document. For questions relating to a specific ... Read Full Answer >>
  2. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  3. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  4. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
  5. Who can make catch-up contributions?

    Most common retirement plans such as 401(k) and 403(b) plans, as well as individual retirement accounts (IRAs) allow you ... Read Full Answer >>
  6. Can you have both a 401(k) and an IRA?

    Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center