An IRA transfer is a method of transferring the assets in an IRA, short for Individual Retirement Account, from one trustee to another without the account holder ever depositing the funds in a personal account. The trustee is the brokerage house or the administrator of the account, while the account holder is the person who owns the funds. Performing an IRA transfer, which is sometimes called a trustee-to-trustee transfer, is appropriate in certain situations to avoid income tax consequences.
People create IRAs to provide some tax advantages for savings designed to fund retirement. Some IRAs provide a tax break on the funds deposited into them, but growth is taxed later. Other IRAs shelter the growth of funds from taxes, but deposits are taxed normally. Many different types of IRAs exist in the United States. Some IRAs are opened and managed by a single person only, while employers can sponsor some types of IRAs for employees.
Keep in mind that an IRA transfer is different from an IRA rollover, even though many people use the two terms interchangeably. The confusion is understandable because, in both instances, the funds in the tax-sheltered account end up in a different tax-sheltered account. However, the differences are important in terms of tax implications and in terms of the options for future use for the account holder.
With an IRA transfer, the funds never end up in the account holder's hands, and he never cashes a check. The account holder might receive a check for the value of his holdings in the old IRA account, but the check is made out to the new trustee, and the account holder does not cash it. Instead, the account holder forwards the check to the new trustee for deposit into the new IRA account. By contrast, with an IRA rollover, the account holder deposits the funds from the old tax-sheltered account into his personal account and then writes a new check for the new IRA account.
In terms of taxes, an account holder making use of an IRA transfer does not receive any tax forms at the end of the year and does not need to report the IRA transfer on any income tax forms. Those performing an IRA rollover will receive Form 1099R for tax purposes, although, if performed correctly, an IRA rollover does not trigger tax consequences. With an IRA transfer, the account holder is not limited to a certain number of transfers. With an IRA rollover, the account holder cannot perform another rollover with the funds for 12 months, but he could perform an IRA transfer with the funds within the 12-month period.