What is the difference between a transfer, rollover, and a contribution?

Understanding the various methods for moving money into or out of your Self-Directed IRA (SDIRA) is crucial for effectively managing your retirement funds. At American Estate & Trust (AET), the three primary methods of moving funds are transfers, rollovers, and contributions. Here’s a breakdown of each one:

1. Transfer

A transfer is the direct movement of assets between two IRAs or from an employer-sponsored retirement plan (like a 401(k)) to an IRA. This can include both cash and non-cash assets, such as real estate or precious metals, as long as those assets are eligible for transfer into your SDIRA.

Key Points:

• Asset Review: Before initiating a transfer request, clients must submit non-cash assets (such as real estate or private stock) for review to ensure compliance with AET’s investment guidelines.

• Request Process: Clients need to complete an AET Transfer Request Form to initiate the transfer from one custodian to their SDIRA.

• Tax Implications: Transfers do not trigger a taxable event because they are not considered withdrawals, but rather a direct movement of assets between accounts.

2. Rollover

A rollover refers to the indirect movement of funds from one retirement account to another, typically from an employer-sponsored plan (like a 401(k)) or another IRA into your SDIRA. Rollovers commonly occur when a person leaves a job or wishes to consolidate retirement funds into a single account.

Key Points:

• Rollover Certification: Clients must submit a completed AET Rollover Certification Form to confirm the timeliness of the rollover and ensure the funds are not subject to restrictions (such as pension funds).

• Rollovers from Employer Plans: Rules may vary depending on the type of employer plan from which the funds are being rolled over. It’s essential to verify these details when submitting the form.

• Tax Implications: Rollovers are not taxable events as long as they are done within the IRS guidelines and rolled over directly into an eligible retirement account. Be sure to follow the correct timeframes to avoid penalties or taxes.

3. Contribution

A contribution involves depositing new funds into your SDIRA. These can be either annual contributions made by the account holder or direct deposits from income. The IRS sets annual contribution limits based on factors like income, age, and whether you participate in other retirement plans.

Key Points:

• Contribution Limits: The IRS limits how much you can contribute each year to your SDIRA. Individuals under 50 have a standard limit, while those over 50 can make catch-up contributions.

• Methods:

  • ACH Contributions: No additional documentation is required if contributing via ACH through the online portal.

  • Wire or Check Contributions: For wire or check contributions, clients must submit a Rollover Certification Form, which can be uploaded to the online portal or submitted with the check.

• Tax Implications: For Traditional IRAs, contributions are generally made with pre-tax dollars, which can reduce your taxable income for the year. For Roth IRAs, contributions are made with after-tax dollars, and qualified withdrawals are tax-free.

Summary of Differences:

Conclusion

Understanding the distinctions between transfers, rollovers, and contributions is key to managing your SDIRA effectively. Each type of transaction has its own set of procedures, required documentation, and tax implications. Whether you're transferring assets from a previous custodian, rolling over funds from an employer-sponsored plan, or making a contribution, following the proper steps ensures that your retirement funds are managed in compliance with IRS guidelines and set up for long-term growth.

If you need assistance with any of these transactions, AET’s team is here to help ensure everything goes smoothly!