IRA Transfer: Definition, How It Works, IRS Tax Rules

What Is an IRA Transfer?

An IRA transfer (or IRA rollover) refers to transferring money from an individual retirement account (IRA) to a different account. The money can be transferred to another type of retirement account, a brokerage account, or a bank account. As long as the money goes into another similar-type account and no distribution is made to you, the transfer does not incur a penalty or fee.

An IRA transfer can be made directly to another account, and IRA transfers can also involve the liquidation of funds for depositing capital in a new account. The Internal Revenue Service (IRS) has established IRA transfer rules, which are discussed below.

Understanding IRA Transfers

Investors establish IRA accounts to save for retirement. Investors can choose from two basic types of IRA accounts: a traditional IRA or a Roth IRA. Investing via these two IRAs means different tax implications that can be an important consideration if an investor chooses to make an IRA transfer. All IRAs are designed to begin payouts at the age of 59½. Distributions taken prior to that by investors may incur early withdrawal penalties.

Traditional IRA

In a traditional IRA, investments are generally made with pre-tax income, though after-tax contributions are also allowed. Contributions to a traditional IRA are usually tax-deductible in the year of the contribution up to a certain limit. For 2022, people under 50 can contribute up to $6,000, and those aged 50 and over can deduct up to $7,000. For 2023, the contribution limits increase to $6,500 and $7,500 respectively.

Withdrawals are taxed at the account holder's income tax rate at the time of the withdrawal. Any early withdrawals or liquidations of a traditional IRA will be taxed at the standard tax rate plus incur a 10% penalty. Distributions of after-tax contributions are not taxed or subject to penalties.

Roth IRA 

In a Roth IRA, investments are made with after-tax dollars. Since investments are made post-tax, withdrawals are tax-free in retirement. However, if you're under age 59 1/2, your withdrawals will be includible in your taxable income and they may be subject to a 10% additional tax.

IRA transfers can be simple when they are made between common types of accounts. An account holder can transfer a traditional IRA from one provider to another without any costs. The same is true with a Roth IRA, which can be transferred easily from one provider to another as long as the type of account is the same.

Traditional IRAs have the greatest tax implications if converted to a Roth or liquidated. Investors converting a traditional IRA to a Roth IRA must pay the income taxes associated with the traditional IRA before depositing funds in a Roth IRA. Investors making a liquidation from a traditional IRA to fund a brokerage account would also have to pay the taxes. In-kind transfers may be accepted from one account to another, however, tax implications would still apply.

IRA Transfer Rules

When considering an IRA transfer, also called an IRA rollover, keep the following IRS rules in mind:

• All distributions may be rolled over, except the required minimum distribution and any distribution of excess contributions and related earnings.
• The transfer must be deposited in the new account within 60 days.
• Only one transfer may be made per 12-month period. This applies to all IRA accounts you may own.
• Money can be transferred to most types of IRA and retirement accounts.
• Your retirement plan is not required to accept your transfer.