What is an 'Eligible Transfer '

An Eligible Transfer allows a person to move assets between a retirement account and another qualifying account without incurring an income tax liability or being charged early withdrawal penalties.

BREAKING DOWN 'Eligible Transfer '

Eligible transfers are regualated by the Internal Revenue Service and take on many different forms. The attractive tax advantages of IRAs make them popular options, and as a result the IRS codifies restrictions on how and when account holders can move these assets. There are three main categories of eligible transfer: rollovers, trustee-to-trustee transfers and transfers due to divorce.

Example of Eligible Transfer 

One of the most common eligible transfers is the rollover of retirement plan assets from an employer-sponsored plan, such as a 401(k) or a profit-sharing plan, to an individual retirement account. This is frequently initiated when an account holder changes jobs, and needs to retain the accrued retirement benefits. A rollover can also be initiated when an account holder decides they no longer wish to participate in their former employer’s retirement plan, or they no longer meet the requirements to maintain an employer plan. Typically, this type of rollover is known as a direct rollover, meaning that fund balance is transferred directly between accounts, and the time to complete the transfer is minimal. Indirect rollovers are also possible, but these typically take 60 days to complete and they are reportable to the IRS.

In addition to the tax-exempt nature of the rollover transaction, a rollover can also help account holders maintain any annual contribution limits, which retirement plans typically require.

Trustee Transfers

A trustee-to-trustee transfer differs from a rollover. Such transfers are made between like accounts, for instance if an account holder desires to move the assets of an existing IRA to an IRA held by a different custodian.

In another scenario, if an account holder finds the need to cover a large medical expense, they may transfer IRA funds directly into a Health Savings Account on a one-time basis without incurring penalties or a tax liability.

Divorce

Splitting assets in case of divorce is always a complicated matter, and retirement plans are no exception, requiring careful planning to maintain annual contribution limits, early withdrawal fees, and other penalties.  

When divorcing, penalties on a shared retirement plan can be avoided if the plan is treated as a transfer due to divorce. The retirement plan custodian can treat this transfer either as a rollover or a transfer without invoking a tax penalty, leaving each party solely responsible for distributions and contributions on their own share of that asset.

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