The Internal Revenue Service permits a range of qualified retirement plans to help people save for retirement. One of the ways that you can move money between qualified retirement accounts is a transfer, which occurs when you tell your financial institution to move the money from one account to another and the financial institution does it directly, without sending you the money.
The IRS only allows you to transfer money between any two qualified retirement plans that you could complete a rollover between, such as moving money from a traditional IRA to another traditional IRA, a 401k plan to an IRA or a 403b plan to a 401k plan. You cannot transfer money out of a qualified retirement plan and into a non-qualified account. For the IRS to consider the transaction a transfer, you cannot touch the money -- it must move between accounts without being paid out to you.
Tax Reporting of Transfers
Unlike rollovers, which require tax reporting even if you do not owe an taxes as a result, you do not have to report your transfers on your income taxes unless they result in income tax liabilities, such as a Roth IRA conversion completed via transfer. This is partly due to the fact that the IRS permits you to make transfers as often as you wish whereas you can only complete one rollover per account per 12-month period.
Tax Withholding on Transfers
Unlike rollovers, which require your financial institution to withhold money from the amount distributed for the income taxes you will owe if you do not complete the rollover, your financial institution does not withhold any money from your transfer. You can, however, elect to have money withheld if your transfer will result in tax liability, such as transferring money from a traditional IRA or 401k to a Roth IRA.
Roth Conversion Via Transfer
The IRS recognizes two types of transfers as ways to convert from a tax-deferred IRA, such as a traditional IRA, to a Roth IRA: trustee-to-trustee transfers and same trustee transfers. The results of either type end up the same way -- the only difference is that a trustee-to-trustee transfer refers to when you move the money in your traditional IRA from one financial institution to a Roth IRA at another institution, while a same trustee transfer refers to moving money from a traditional IRA to a Roth IRA at the same institution. Either way, using a transfer to convert from a traditional IRA to a Roth IRA still results in taxes on the converted amount.
- Creatas/Creatas/Getty Images