Withdrawal vs. Transfer: What’s the Difference?

When managing your Self-Directed IRA (SDIRA), it’s important to understand how money or assets can move out of your account—and the very different consequences depending on how you do it. We often see clients accidentally request a withdrawal when they actually mean to transfer funds to another IRA custodian. This can have serious tax implications, so let’s break it down.

🚫 Withdrawal / Distribution

What It Is:

A withdrawal (also called a distribution) is when funds leave your IRA and go directly to you personally.

What Happens:

• You receive the funds in your personal bank account or by check.

• The IRS treats this as a taxable event.

• You may owe income taxes and possibly early withdrawal penalties (if you’re under age 59½).

• Once distributed, the money is no longer in your retirement account.

Example: You request a $50,000 distribution, and the funds are sent to your personal bank. That amount will be reported to the IRS as taxable income.

🔁 Transfer to Another Custodian

What It Is:

A transfer is when funds move directly from your SDIRA with us to another IRA with a different custodian—without ever touching your hands.

What Happens:

• This is a non-taxable event.

• The funds stay within the IRA system, preserving their tax-deferred status.

• No reporting of income to the IRS is required.

• You must provide transfer paperwork from the receiving custodian.

Example: You are moving your IRA to a new custodian and want to take $50,000 with you. You provide transfer documents from your new custodian, and the funds are sent directly to them. No taxes or penalties apply.

⚠️ Why the Confusion Happens

Many clients are used to managing personal bank accounts and assume that any money leaving the account is just a “withdrawal.” Others may request a withdrawal simply because the form is easier to fill out.

Here’s what typically happens:

• You request a withdrawal, but list another custodian as the payee.

• Our Operations team puts the request On Hold for Corrections and adds a note like:
  “Funds must go directly to the client for WD/BillPay Distribution – If transferring funds, transfer out documents are required.”

• This leads to confusion: “Didn’t I already make the right request?”

✅ How to Get It Right

🔄 Rollover vs. Transfer (Bonus Tip)

You might also hear the term rollover. A rollover is similar to a transfer, but the key difference is that you take possession of the funds temporarily and must deposit them into another IRA within 60 days to avoid taxes. This would be submitted as a Withdrawal or Distribution request, which would result in a 1099R being generated by AET at year-end. Provided you have rolled the funds into a qualified plan within the allotted timeframe, your successor custodian will provide you with an offsetting 5498 tax document. 

💡 Still Unsure?

If you're not sure whether your request should be a withdrawal or a transfer, please contact our Support team before submitting.