The difference between an IRA transfer and a reinvestment is that the transfer occurs between retirement accounts of the same type, while a reinvestment occurs between two different types of retirement accounts. For example, a transfer occurs when funds are transferred from an IRA in one bank to an IRA in another bank. The difference is really the type of account that is being moved. In a transfer, one IRA is usually transferred directly to another IRA.
In a reinvestment, an employer-sponsored plan is generally transferred to an IRA, and this can be direct or indirect. There are conflicting currents of thought in the financial world as to whether moving money to and from retirement accounts is considered a reinvestment or a transfer. One idea is that a transfer involves moving money between two of the same types of retirement accounts, for example. Whereas, if you're transferring funds between two different types of retirement accounts, that would be a reinvestment.
Another current of thought determines whether moving funds is a reinvestment or a transfer, depending on the party that initiates the movement of funds. For example, if you (as the account holder) initiate the transfer of funds, it would be a reinvestment. Reinvestments generally include transferring money from an employer-sponsored plan, such as a 401(k), 403(b), 457, a savings savings plan (TSP), a pension plan, etc., to an IRA or a new employer-sponsored plan, such as a Solo 401k. These would be considered accumulations, because the movement of money is starting.
For example, if you set up your 401(k) Solo plan with Nabers Group, you'll initiate the transfer from your employer's previous 401(k) plan so that the funds reach your Solo 401k plan. Similarly, you can initiate the transfer from an old IRA so that the funds reach your Solo 401k plan. A transfer, on the other hand, is initiated by an outside party, such as an IRA custodian. In other words, the new custodian sends the request to the resigning custodian.
While “reinvestment” is the general term used to move money from one retirement account to another, sometimes reinvestment is not a reinvestment, but rather a transfer. In the world of “transfers”, a direct transfer could also be referred to as a trustee-to-trustee transfer. This is another way of saying that funds move directly from one retirement plan to another. Direct reinvestments and trustee-to-trustee transfers are generally fairly simple.
With an IRA, your depositary will request the funds from your old IRA custodian, get the money, and deposit it into your new IRA. With a Solo 401k, Nabers Group's 401k software will prepare personalized direct reinvestment documents to request that funds be sent directly to its new Solo 401k trust, avoiding taxable distributions. The cumulative check will be credited to your new Solo 401k trust and you will deposit the check into a bank or brokerage account that is also in the name of your 401k trust. This way, the funds go directly from one retirement account to another.
If you are making an indirect reinvestment, you may have taxes withheld: 10% for an IRA and up to 20% for a 401k. This is called cumulative distribution. Funds are held if you don't deposit accumulated funds on time. The withheld funds are there to cover the taxes you might owe on those distributed funds.
A cumulative distribution is generally considered part of your taxable income. Reinvestments are generally listed on IRS Form 1099-R. If you have a Solo 401k with Nabers Group, we will provide you with a 1099-R model for you to share with your current custodian or plan administrator to help you complete and document your direct reinvestment correctly. If the depositary of your IRA makes a direct transfer to another IRA or to your Solo 401k, you may not receive any copies of the 1099-R.
You can request a copy of the 1099-R for your record to ensure that the direct transfer was properly documented. If you made a direct transfer from one retirement account to another (such as an IRA to IRA transfer), you won't receive any notification from your previous depositary in the form of a 1099-R. This is because the transaction is not reported to the IRS. You can transfer funds between your retirement accounts as many times as you want, for as long as you want.
There are no restrictions or limitations on transfers between IRA custodians and IRA custodians. If you have made an indirect reinvestment, your custodian will send you a Form 1099-R that documents the amount that was distributed from your retirement plan. Any deviation of the deposit from the amount on Form 1099-R will be a taxable event. Read our blog post on how to document an indirect transfer to your Solo 401k plan.
Whether you're making an indirect transfer, a trustee-to-trustee transfer, or a direct transfer, keeping a good record is crucial. Whenever it comes to retirement accounts, it's vital that you keep an exhaustive record of when you submitted the documentation, how the funds were received, who the check was paid to, who you spoke to at your old and new custody firms, etc. Nabers Group will give you all your support for your IRA or 401k reinvestment in Solo and we will do our best to help you complete a direct or trustee-to-trustee transfer for the cleanest tax records. Nabers Group is an accredited company by the Better Business Bureau with a fanatical dedication to excellence in customer service and lifetime customer service for our account holders.