IRA Rules: Funding An IRA With Rollovers, Transfers and Contributions

The Rules About Self-Directed IRA's

A Self Directed IRA is typically funded by making an IRA Rollover or Direct Transfer, or by making annual IRA Contributions. The more common approach is to rollover from an existing 401(k) or other employer-sponsored retirement plan, or to transfer one or more existing IRA accounts.  Another option would be to make an annual IRA contribution, even though it might take several or more years to accumulate sufficient funds to purchase assets in a Self Directed IRA.

As someone who recognizes the value of setting aside money for retirement, you may be interested in learning how easy it is to fund a self directed IRA or real estate IRA by:

  • Rollovers from 401(k) or other retirement plans and IRAs
  • Direct Transfers
  • Annual IRA Contributions

It’s never too late to plan for your future. Open an IRA today or visit our IRA Resource Center for additional information about our IRA products and services.

An IRA Rollover or Rollover IRA occurs most often when:

  • An employee retires, changes jobs or separates from employment for any reason, and as a result they are entitled to receive a distribution of their 401(k), 403(b), 457 or Thrift Savings Plan retirement funds and rollover to an IRA, or
  • An individual receives a distribution of cash and/or assets from an existing IRA and has 60 days to complete the rollover of the same property in order to avoid taxes and possible penalties.

Why consider a Direct Rollover from a 401(k) or other employer-sponsored retirement plan? 

By rolling over an ex-employer’s retirement plan into a Rollover IRA, you maintain the tax deferred status of your retirement account.  Also, a Rollover IRA will allow you to consolidate all of your ex-employer’s retirement accounts into one IRA, making it easier to manage your retirement investments. 

A significant advantage of a Rollover IRA versus leaving your retirement assets with an ex-employer is increased investment flexibility.  More advantages include:

• More Control
When the rollover process is complete, you’ll no longer be restricted by the rules and policies of your former employer's retirement plan. In addition, you can avoid potential problems seen with some retirement plans such as untimely statements, lack of account information, limited investment options and any risk of the plan getting tangled in a bankruptcy matter should the former employer encounter financial troubles.

• Avoid Withholding and the Tax Risk
If you request a check from your employer-sponsored retirement plan, your employer will have to withhold 20% for federal income taxes.  Unless you initiate a direct rollover to an IRA or transfer into a new employer’s plan, you would need to come up with the 20% from your own pocket in order to avoid taxes and early withdrawal penalties.  By requesting a Direct Rollover to an IRA, you can avoid the withholding, and the risk of missing the 60-day deadline.

• Keep Your Money
By rolling over, you will maintain the tax-deferred status of your retirement money and, best of all, you won’t have to pay taxes on your earnings until you withdraw the money. you request a check from your employer-sponsored retirement plan, your employer will have to withhold 20% for federal income taxes.   

• Greater Investment Diversification
Your previous employer’s plan probably had between 10-15 mutual funds to choose from. By completing an IRA rollover, you will increase your investment options and improve your investment flexibility rolling over, you will maintain the tax-deferred status of your retirement money and, best of all, you won’t have to pay taxes on your earnings until you withdraw the money. 

• Accessibility
Though you cannot take a loan against your IRA as permitted by some 401(k) plans, some penalty-free withdrawal options are available with IRAs for events such as a first-time home purchase or for certain education expenses.

• Estate Planning
The beneficiary designation strategy commonly referred to as a stretch IRA, can be used to extend the tax deferred growth on the account.  By naming a young beneficiary on your IRA, that beneficiary would be able to take payouts from the inherited IRA over his or her life expectancy, thus stretching the life of the IRA account. Many employer-sponsored retirement plans require non-spouse beneficiaries to take a one-time lump distribution.

• An Opportunity for Roth Conversion
The income limitation that had once prevented many individuals from converting to a Roth IRA no longer apply.  Now, all individuals are eligible to convert regardless of your Modified Adjusted Gross Income (MAGI).  Although a Roth conversion is a taxable event, a tax professional can help you determine if the potential long-term tax advantages of converting outweigh the short-term tax consequences.

How is a Direct Rollover from a 401(k) or other employer-sponsored plan to Self Directed IRA Services, Inc. accomplished?

Whether you are retiring, changing jobs, or separating from employment for any other reason, leaving a job can be the perfect opportunity to reevaluate your retirement plan needs. Moving your retirement funds to a Rollover IRA can seem like a daunting task, but it is really quite simple if you follow these easy IRA rollover rules:

Step 1: Contact your plan administrator to get the distribution packet and complete the paperwork by selecting a direct rollover to Self Directed IRA Services, Inc.

Step 2:  If you’re not already an accountholder, you’ll need to open an IRA.  Just follow the easy steps outlined in the IRA new account opening kit.  

Step 3:  Return the completed forms in the distribution packet to your plan administrator and provide a copy to Self Directed IRA Services, Inc.

How long does a Direct Rollover take?

A direct rollover from an employer’s retirement plan generally takes 3-6 weeks.

How long does a Rollover take from one IRA to another IRA?

You can request a distribution from another IRA and complete the rollover of the same cash or assets, generally in less time than it takes to complete a direct transfer. However, it is a reportable event, which means the resigning IRA custodian will report the distribution on an IRS Form 1099.A distribution from your IRA is usually done either in the form of a check (if you've requested a liquidation) or as an in-kind distribution (if you requested re-registration of the assets). You then have up to 60 days to reinvest the funds or reregister the assets to your Rollover IRA. If the funds or assets are not rolled over within 60 days, taxes and possible penalties would be incurred.

Are there any restrictions on rollovers between IRA accounts?

The IRS limits you to only one 60-day rollover during a 12 month period when rolling from one IRA account to another IRA.  In addition, the same property rule applies, which means that you must rollover the same property (cash or in-kind assets) that were distributed to you from the other IRA.

IRA transfers are the most common funding method for a new or existing self directed IRA. A direct transfer is the movement of IRA funds or assets directly from one IRA custodian to another. Through a direct transfer, the IRA owner never takes possession of their retirement funds or assets. 

The main advantage of a direct transfer is that there is no tax liability and no IRS reporting as with a distribution.  This is because funds are transferred from one institution to another.  In most cases a direct transfer is a simpler and can be a better option since it avoids having to comply with the 60 day rule and the possibility of incurring taxes and penalties.

Furthermore, there is no limit on the number of direct transfers an IRA owner is allowed.

Why consider a Direct Transfer?

There are several reasons to consider an IRA transfer to an IRA with Self Directed IRA Services, Inc.:

  • Greater investment flexibility since you will likely now have more investment options available
  • Easier monitoring and tracking of your IRA investment portfolio on one comprehensive, easy-to-understand statement.

How is a Direct Transfer to Self Directed IRA Services, Inc. accomplished?

It’s easy to request a Direct Transfer of your IRA funds or assets. 

  • If you don't already have an account with us, you’ll need to open an IRA. The IRA Transfer Request form is included in our new account opening kits.  Simply follow the easy instructions outlined in the IRA kit.
  • If you’re an existing accountholder, simply download our IRA Transfer Request form.

How long does a Direct Transfer take?

A Direct Transfer usually takes about 2 weeks, give or take a few days.  This timeframe may be reduced if you request overnight delivery, wire transfer of cash, or make arrangements with your resigning IRA custodian to process via a fax.

What else should I know about a Direct Transfer?

It is important to remember when transferring assets in-kind (other than cash), the asset must be one that Self Directed IRA Services, Inc. will accept and hold.  If the assets to be transferred in-kind is real estate (directly owned) or a private equity or private debt investment, please refer to our Investment Checklist and Forms for that investment type.  Direct transfers in-kind of publicly-traded stocks, bonds and mutual funds require a brokerage account with any clearing firm or discount brokerage. 

Need Help?

If you have a question or need help, please contact us.

2013-2014 IRA Contribution Rules

With the 2013-2014 maximum annual IRA contribution limit for Traditional and Roth IRAs at $5,500 for individuals under age 50 ($6,500 for ages 50+), it wouldn’t take long to start building a self directed IRA with annual contributions. 

With a Simplified Employee Pension (SEP), the annual contribution limit increases to as high as $51,000 for 2013 and $52,000 for 2014, enabling a quick source of funding for a self directed SEP IRA.  Plus, if you also consider making an additional annual IRA contribution of $5,500 (or $6,500 if age 50+), you can quickly amass a sufficient balance to start self directing an IRA.

How long does it take to open a self directed IRA and make a contribution?

The process can be handled in as little as 1-2 days.  Ready to open an IRA?

Are you ready to initiate a Rollover or Transfer now?

We're here to help.  Contact us now to get started.