A trustee-to-trustee transfer moves retirement money directly between financial institutions without sending the funds to you first. This can simplify moving IRA assets, keeping the money within the retirement system. It also generally avoids the 60-day deadline and once-per-year restriction that can apply to certain IRA rollovers.
A financial advisor can help you plan out how to save, move and withdraw your retirement savings.
How a Trustee-to-Trustee Transfer Works
A trustee-to-trustee transfer generally occurs when assets move directly from one IRA trustee or custodian to another. You initiate the transfer, typically by providing information about the existing and receiving accounts, but you do not personally take possession of the money. The old custodian may then electronically transfer the assets or issue a check payable to the new trustee.
This is different from a 60-day rollover. With a 60-day rollover, an IRA distribution goes to you first. From there, you must deposit the funds into an eligible retirement account within 60 days to prevent the amount from becoming taxable. The IRS generally does not consider a direct trustee-to-trustee transfer as a distribution. Therefore, the 60-day rollover process does not apply.
The distinction can be important for people who move retirement accounts frequently. The IRS generally permits only one IRA-to-IRA 60-day rollover during any 12-month period, regardless of how many IRAs you own. Trustee-to-trustee transfers are not subject to this once-per-year limitation. This can make them a simpler way to consolidate or change IRA custodians.
Direct Transfer vs. 60-Day Rollover
Consider someone who wants to move a $100,000 traditional IRA to another financial institution. With the trustee-to-trustee method, the full $100,000 moves directly to the receiving IRA without the owner receiving the funds. There is no 60-day deadline, and the transaction does not count toward the once-per-year IRA rollover limit.
With the 60-day rollover, the IRA owner receives the distribution. They generally must redeposit it into an eligible retirement account within 60 days. If they properly complete the rollover, the amount generally is not included as taxable income. However, if they miss the deadline, some or all of the distribution may become taxable. They may owe an additional tax for an early distribution.
| Method | IRA Balance | Amount Sent to Account Owner | 60-Day Deadline | Once-Per-Year IRA Rollover Rule | Taxable if Completed Properly |
|---|---|---|---|---|---|
| Trustee-to-trustee transfer | $100,000 | $0 | No | No | Generally no |
| 60-day rollover | $100,000 | $100,000 | Yes | Generally yes | Generally no |
Transfers Between Traditional and Roth IRAs
Moving money directly from one traditional IRA to another generally preserves the assets’ tax-deferred status. The investor does not recognize taxable income merely because they are moving the account from from one custodian to another, assuming the transaction qualifies as a trustee-to-trustee transfer.
The outcome changes when moving pretax traditional IRA money to a Roth IRA, known as a Roth conversion. Because the amounts being transferred are previously untaxed, when they are converted to a Roth IRA, they are generally included in taxable income for the year of the conversion. The IRS allows investors to complete a Roth conversion through a trustee-to-trustee transfer, a same-trustee transfer or a rollover.
Using a direct transfer can still make the transaction easier by keeping the money out of the account owner’s hands. But the transfer method does not erase the income tax created by converting pretax retirement assets to a Roth IRA. An investor considering a large conversion may therefore want to evaluate how the additional taxable income could affect their marginal tax rate and overall tax plan.
Moving Money From a 401(k) or Other Workplace Plan
Moving assets from a 401(k) or another employer-sponsored retirement plan to an IRA or another eligible employer plan is generally described as a rollover rather than an IRA trustee-to-trustee transfer. When the old plan sends the money directly to the receiving retirement account, the transaction is a direct rollover.
One major advantage of a direct rollover is avoiding mandatory federal withholding. When an eligible rollover distribution from a workplace retirement plan goes directly to the participant, the plan generally must withhold 20% of the taxable amount for federal income taxes. A direct rollover to an eligible retirement account generally avoids that withholding.
| $100,000 Distribution | Direct Rollover | Payment to Participant |
|---|---|---|
| Amount sent immediately | $100,000 to new account | $80,000 to participant |
| Mandatory federal withholding | $0 | $20,000 |
| Amount needed for full $100,000 rollover | $100,000 already transferred | Participant generally must replace withheld $20,000 |
For example, if a participant requests a $100,000 eligible rollover distribution to be paid personally, the plan would generally send $80,000 and withhold $20,000. To roll over the entire $100,000 within the applicable deadline, the participant would generally need to replace that $20,000 with other funds. They may later recover some or all of the withholding through their federal tax return, depending on their tax liability. However, by choosing a direct rollover instead, the entire $100,000 would move directly into the receiving account, avoiding that gap.
How to Complete a Trustee-to-Trustee Transfer
A trustee-to-trustee transfer generally starts with opening or identifying the IRA that will receive the assets. Investors commonly contact the new custodian and request that it initiate the transfer from the existing institution. Having the receiving institution manage the process can help ensure the funds transfer directly between custodians, avoiding personal distribution.
Before submitting the request, confirm that the accounts are registered appropriately and determine how the investments will move. Some stocks, bonds, mutual funds and other securities may be transferable “in kind,” meaning it’s possible to move the investments themselves without selling them. Other holdings may need to be liquidated first, depending on what the receiving custodian can hold.
It is also useful to retain transfer forms, account statements and confirmations showing where the assets originated and where they were deposited. Those records can help establish that the money moved directly between retirement custodians.
Choosing the correct method matters. A trustee-to-trustee IRA transfer, a direct workplace-plan rollover and a Roth conversion can have very different tax consequences even though each may involve moving retirement money between financial institutions. A financial advisor or tax professional can help determine which transaction applies and evaluate how the move fits into an investor’s broader retirement and tax strategy.
Bottom Line
A trustee-to-trustee transfer can be a straightforward way to move IRA assets without taking possession of the money or triggering the 60-day deadline and once-per-year rollover rule. Direct rollovers from workplace plans can offer similar advantages by avoiding mandatory withholding. Roth conversions, however, may still create taxable income regardless of method. Understanding which type of transaction applies can help prevent unnecessary taxes, penalties and administrative mistakes.
Tips for Retirement Planning
- A financial advisor is a great resource and partner in preparing your finances for your long-term retirement goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You may want to know whether you’re saving enough for retirement. Consider using a retirement calculator to help you determine whether you’re on track for your long-term financial goals or not.
Photo credit: ©iStock.com/Jacob Wackerhausen, ©iStock.com/Wasan Tita
Read the full article here
