An IRA transfer and a rollover accomplish the same objective but in different ways and often with different consequences. Both move funds from one retirement account to another. Internal Revenue Service rules determine the income tax implications and the potential effect each can have on your retirement account balance.
Transfer vs. Rollover Methodology
With an IRA transfer -- also called a direct transfer or a trustee-to-trustee transfer -- you never see the money. Instead, the plan administrator or custodian from the financial institution currently holding your retirement funds transfers all or a portion of it to an IRA account, usually at a different financial institution, according to your instructions.
In contrast, with an IRA rollover, the plan administrator or custodian from the financial institution currently holding your retirement funds issues you a check. You then redeposit that check into a different IRA account.
IRS rules do not require that you report an IRA transfer on your annual income tax return. Therefore, an IRA transfer has no income tax implications no matter how many you complete within each calendar year.
Unlike with a transfer, an IRA rollover can have significant income tax implications. Although you can execute more than one IRA rollover within the same 12 month period, IRS rules say that even if you’re rolling money from different IRA accounts, only one rollover can be tax-free. After the first one, you must report the full amount of any other rollover distributions on your annual return and pay income tax on the money. In addition, if you don’t complete an early distribution rollover-- one taken before you reach 59 ½ years of age -- within 60 days, you also may incur an additional 10 percent tax penalty.
Borrowing Against an IRA
As long as you don’t violate the 12-month rule, it is possible to treat an IRA rollover distribution as a tax-free temporary loan. However, you must redeposit all of the money into the same or a different IRA account within 60 days or face a tax obligation, and possibly an early withdrawal tax penalty.
If you execute more than one rollover, you can still treat the rollover as a temporary 60-day loan, but there will be tax implications. For example, if you withdraw and redeposit $5,000 back into the same or a different IRA within 60 days, you won’t incur an income tax obligation. If you withdraw another $5,000 six months later and redeposit the money within 60 days, you’ll incur an income tax obligation but not the 10 percent tax penalty that would arise if the distribution was considered an early withdrawal.