Direct Transfer

A direct transfer is a transfer of assets from one type of tax-deferred retirement plan or account to another. Direct transfers are not considered official distributions and are therefore not taxable as income or subject to any penalties for early distribution. This type of transfer now usually occurs electronically.

An account or plan owner may make a direct transfer by filling out requisite paperwork or taking the necessary steps via a mobile banking or investing app like TD Bank’s or Vanguard’s. Most transfers take several days to complete although a portion of funds is often available immediately, particularly when making a direct transfer between savings and/or checking accounts. Transfers among higher-touch investing accounts often take longer to clear.

When using a mobile app to make a direct transfer, it’s important that retail investors take strong cybersecurity precautions. It’s equally important for employers, particularly financial institutions, to implement policies that protect users making direct transfers and other transactions online from cyberthreats. Two-factor authentication like Touch ID is a common tactic to protect many consumers. For retail investors and bank customers, making sure you have a strong and complex password can also help.

Direct rollovers from qualified retirement plans occur when the retirement plan administrator pays the plan’s proceeds directly to another plan or IRA, often in the form of a check. In the case of a 60-day rollover, funds from a retirement plan or IRA are paid directly to the investor, who must deposit the funds in another retirement plan or IRA within 60 days to avoid penalty.

Examples of qualified retirement plans include:

• 401(k) plans
• Profit-sharing plans
• 403(b) plans
• 457 plans
• Money purchase plans
• Target benefit plans
• Employee stock ownership (ESOP) plans
• Keogh (HR-10)
• Simplified Employee Pension (SEP)
• Savings Incentive Match Plan for Employees (SIMPLE)

The Internal Revenue Service (IRS) provides a guide to common qualified plan requirements. In general, qualified retirement plans meet the requirements of Internal Revenue Code Section 401(a) and are thus eligible to receive certain tax benefits. They usually come in two forms: the defined benefit and defined contribution plans. A cash balance plan is a hybrid of these two.

Taxes are typically not paid when performing a direct rollover or trustee-to-trustee transfer. However, distributions from a 60-day rollover and funds not rolled over are typically taxable.