Function

• IRA rollovers refer to moving money from one IRA to another by having the money paid to you and you redepositing the money in another IRA within 60 days. During the time you receive the money and the time you redeposit it, the IRS does not limit what you can do with the money.
  
  With an IRA transfer, the money is moved direct from one IRA account to the other by your financial institution. You never touch the money.
  
  

Time Frame

• The Internal Revenue Service does not restrict the number of times you can use transfers to move money from one qualified retirement account to another. If you wanted, you could move money from one IRA to a second IRA, back to the first, and then into a third in the same year.
  
  However, the IRS does limit rollovers, to one per account per 12-month period. For example, if you moved $10,000 from IRA account A to IRA account B, you could not move that money for 12 months after the rollover.
  
  

Withholding

• When you perform a direct transfer of funds from one IRA to another, the total amount of the transfer is deposited in the new account without any tax withholding.
  
  With a rollover, 20 percent of the amount of the distribution is withheld to go toward taxes and penalties you will owe if you do not complete the rollover. However, you are still responsible for redepositing the entire amount. For example, if you roll over $40,000, you receive a check for only $32,000 because $8,000 is withheld, yet you still must redeposit $40,000.
  
  

Benefits

• When you perform a rollover, you can use the funds for up to 60 days without any restrictions on their use. For example, if you have your year-end bonus coming up in five weeks but you need money now for a home down payment, you could roll over money from your IRA, use the proceeds of the rollover for the down payment, and then use your year-end bonus to complete the rollover.
  
  A transfer has the advantage of having the money automatically transferred, so the movement of funds is faster and you do not have to do anything after requesting the transfer.
  
  

Warning

• With an IRA rollover, if you fail to complete the rollover within 60 days, the money will be considered a distribution from the account. If you are younger than 59 1/2, you will be considered to have taken an unqualified distribution and will have to pay a 10 percent early distribution penalty, on top of any income taxes that you owe. If you choose a transfer, you do not have to worry about this.