As Self-Directed IRA Administrators, Entrust Freedom continually receives funds for client transactions. The funds originally come into the account in one of three methods: Via Contribution, Transfer, or Rollover. I think most everyone knows what an IRA contribution is. For those who are new to the IRA world, contributions are simply money that you add to the account out of your own pocket. There are limits to annual contributions which are based on your earnings and/or your age. This article will focus on the other two ways money can enter an Entrust IRA and the differences between each.
Let’s start with transfers. A transfer is a custodial to custodial bank transfer of assets between like-kind IRA’s. The transfer is initiated by the receiving institution. The receiving institution signs off on the transfer request as “accepting custodian” and confirms that the money will be placed in an IRA account. This “letter of acceptance” is important to the Internal Revenue Service because they have definitive proof that the money went from IRA to IRA and in no way did a taxable event occur. Therefore, the IRS doesn’t even want to know that the transfer occurred. Transfers are non-reportable events, so there is no need for our clients or either custodial bank involved in the transfer to report anything to the IRS for this transaction. Typical custodians require original signatures on the transfer paperwork. The average transfer takes about two weeks. Also, you can do as many transfers per year as you choose.
Rollovers are a little more complicated. If money is leaving a non-IRA account (i.e. employer plans such as 401(k), 403(b), 457, Pension Plans, Defined Benefit Plans, Profit Sharing Plans), then the money received by the receiving IRA custodian must be coded as an incoming “Rollover”. The sending firm will report the transaction on form 1099-R, which tells the IRS that a taxable event has occurred. However, assuming the receiving IRA custodian receives the money within 60 days, the taxable event (and possible penalties) is offset by the rollover received.
For example, I have an old 401(k) plan from a previous employer. I fill out a Direct Rollover Form from the current plan administrator. The administrator sends a check to Entrust and I will receive a 1099-R from them in January of next year. When I file my taxes, the forms will ask if I received a 1099-R. I write the dollar amount in. The next line asks if I rolled any of these funds into an IRA within 60 days. Again, I write the dollar amount in. As long as the two dollar amounts are identical, there will be no tax effect. Entrust will send form 5498 to the IRS to confirm receipt of the rollover.
There can also be a rollover from an IRA if the client has taken a distribution and is returning the funds within 60 days. Many clients view this transaction as a loan from their IRA. However, in reality, there is no such thing as a loan from an IRA. You can take a “distribution” and then “roll” them back to the IRA within 60 days. Just because you put the funds back doesn’t change the fact that a reportable event has occurred. So, if you take a distribution and then roll the funds back, it will still be reported when you file your taxes in the same manner as the example above.
There are two downsides to a rollover when compared to a transfer. First, it is a reportable event, so it will cause slightly more work when you file your taxes. Secondly, you are potentially only allowed one rollover per year, so you are a little more limited. There is no limitation to the number of transfers you can do annually.
As far as the upsides of a rollover, if you have a current IRA and speed is essential, you might consider a rollover. For example, if your IRA has a real estate closing next week and you don’t have 2-3 weeks to wait on a transfer, you could consider taking a distribution from your current IRA (this usually only takes a few days depending on how liquid the assets in the account are). Once the money is wired to your account, you can wire it to Entrust. We have seen clients do rollovers in the matter of 1 day. If you plan ahead, the transfers are the easier of the two, but again, if time is essential, rollovers can be quicker.
Brandon Hall, CISP, MBA is the Director of Operations of Entrust Freedom, LLC. Feel free to contact him at BHall@EntrustFreedom.com or 239.333.1031 x211.