Retirement Planning

What Is an IRA Transfer—and How Does It Work?

What Is an IRA Transfer—and How Does It Work?

Think of an IRA as a vessel carrying retirement wealth through decades of market changes. At the end of 2024, IRAs represented about $17.0 trillion, the single largest share of U.S. retirement assets, with balances at $16.8 trillion in Q1 2025. Given the scale, shifting funds between accounts is routine. Yet confusion between transfers and rollovers leads some investors to accidental taxes or penalties.

The main distinction is straightforward:

  • A transfer is custodian-to-custodian and avoids taxable events.
  • A rollover places funds briefly in the account holder’s hands, creating strict deadlines and added reporting.

Missing an IRS requirement—even unintentionally—can turn a routine move into a costly error. This guide outlines how transfers work, how they diverge from rollovers, and the compliance details investors should keep in mind.

¹ The following article is provided for educational purposes only and does not constitute personalized investment, tax, or legal advice. Any examples are hypothetical and for illustrative purposes only. Investing involves risk, and outcomes may differ materially from any projections or scenarios discussed. Readers should consult with a qualified financial, tax, or legal professional regarding their individual circumstances.

Key Takeaways

  • Direct transfers shift IRA assets between custodians without the account holder touching the funds.
  • Rollovers can be direct or indirect, but indirect rollovers have a strict 60-day redeposit limit.
  • The IRS allows unlimited direct transfers, but only one indirect rollover every 12 months across all IRAs.
  • Transfers usually require no tax reporting, while rollovers generate Forms 1099-R and 5498.
  • Mistakes—such as missed deadlines or mixing after-tax and pre-tax funds—can create unexpected tax bills.

Direct Transfers vs. Rollovers: Comparing the Two

Feature Direct Transfer Rollover (Indirect)
Custodian-to-custodian Yes No (funds sent to account holder)
IRS Annual Limit None One per 12 months (across all IRAs)
Deadline None 60 days to redeposit
Tax Reporting Typically none Forms 1099-R & 5498 required
Risk of Taxable Event Low (if processed correctly) Higher—missed window creates taxes

IRS Rules and Deadlines

IRS regulations make a clear distinction:

  • The one-rollover-per-year limit applies only to indirect IRA-to-IRA rollovers, aggregated across all IRAs.
  • Trustee-to-trustee transfers are unlimited.

If funds from an indirect rollover aren’t deposited within 60 days, they’re treated as taxable. Those under age 59½ may also face an extra 10% penalty [IRS, Pub 590-B].

Exceptions exist. Relief may come through automatic waivers, self-certification (Rev. Proc. 2020-46), or, in some cases, a private letter ruling [IRS, Pub 590-A].

Hypothetical Example: A Costly Misstep

Picture an investor moving $250,000 from a brokerage IRA into a self-directed IRA to buy real estate. If the distribution check is payable to them personally and they fail to redeposit within 60 days, the entire amount becomes taxable income that year. The result could be a higher tax bracket and, for those under retirement age, an additional penalty.

By contrast, instructing both custodians to conduct a direct transfer avoids taxes, avoids reporting, and sidesteps rollover limits.

Transfers and Alternative Assets

Self-directed IRAs can hold nontraditional assets such as real estate, precious metals, or private equity. These investments add extra compliance hurdles. Custodians dealing with alternatives often require more paperwork, and the IRS strictly prohibits certain transactions that could disqualify the account.

Best practices when transferring funds for alternative assets include:

  • Confirming the receiving custodian accepts the asset type.
  • Keeping written records of all instructions and confirmations.
  • Avoiding any commingling of IRA and personal funds.

Beyond IRAs: Other Retirement Accounts

Though this article focuses on IRAs, similar rules apply to other retirement plans such as 401(k)s. Employer plans, however, often include additional restrictions or overrides. For example:

  • Direct rollovers from employer plans avoid the 20% mandatory withholding that applies when distributions go directly to the participant.
  • Each plan sponsor may have unique procedures, so it’s important to check with HR before initiating.

Compliance and Reporting

  • Direct transfers usually bypass IRS reporting—no Form 1099-R is issued, since no distribution is considered to occur.
  • Rollovers, on the other hand, require reporting on both Form 1099-R (distribution) and Form 5498 (redeposit).

For investors with significant balances, even a small paperwork misstep can create a major tax exposure. Many rely on custodians experienced with complex rollovers and alternative asset rules to reduce risks.

At the end of the day, the objective of an IRA transfer is simple: preserve the account’s tax-advantaged status. While the process may seem procedural, handling it carefully is one of the most effective ways to safeguard retirement growth.

IRA Transfers vs Rollovers — FAQs

What is the main difference between an IRA transfer and a rollover?
A transfer moves assets directly between custodians without the investor handling funds, while a rollover involves temporary receipt by the account holder.
How many direct IRA transfers are permitted each year?
The IRS allows unlimited direct transfers per year, since funds move custodian to custodian without triggering distribution reporting.
What is the annual IRS limit on indirect rollovers?
Investors may complete only one indirect rollover across all IRAs in a 12-month period, regardless of how many accounts they hold.
What deadline applies to indirect rollovers?
Indirect rollovers must be redeposited within 60 days. Missing the deadline generally makes the amount taxable and may trigger an additional 10% penalty if under age 59½.
Do direct transfers require IRS tax forms?
Typically no. Direct transfers usually avoid Form 1099-R reporting, while rollovers require both Form 1099-R for the distribution and Form 5498 for the contribution.
What happens if an investor personally deposits an IRA distribution after 60 days?
The IRS treats it as taxable income for that year, potentially pushing the investor into a higher bracket and adding early withdrawal penalties if under retirement age.
Can the IRS waive the 60-day rollover deadline?
Yes. Waivers may be granted through automatic exceptions, self-certification, or private letter rulings under established IRS procedures.
Why are indirect rollovers considered higher risk than direct transfers?
Because the investor temporarily takes possession, errors such as missed deadlines or misdirected funds can convert a tax-free move into taxable income.
What extra risks come with transferring funds into self-directed IRAs?
Alternative assets like private equity, metals, or real estate involve additional compliance paperwork, custodian limitations, and IRS prohibited transaction rules.
What precautions should be taken when funding alternative investments through an IRA?
Investors should confirm the custodian’s policies, keep written transfer records, and avoid commingling IRA money with personal accounts to preserve tax status.