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.