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What is a Direct Transfer?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 September 2016
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    Conjecture Corporation
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A direct transfer is a term used to describe the movement or transfer of assets from one kind of retirement plan to another. In most cases, the two plans involved will be similar. As an example, both plans may be structured as tax-deferred plans. The transfer can be initiated by account owner and can usually be completed within a short period of time.

One of the most common examples of the use of a direct transfer is when an individual accepts a new job with an new employer. Assuming that both employers offer a similar retirement plan, it is possible to move the funds from the original plan to the plan that is offered by the new employer. This allows the employee to avoid having to pay taxes on the funds that are transferred, since the transaction counts as a direct rollover.

The same is true with individual retirement plans offered in many nations. For example, both the Individual Retirement Account or IRA offered in the United States, and the Individual Savings Account or ISA offered in the United Kingdom, can be rolled over into a similar type of retirement plan that current governmental regulations recognize as a qualified retirement plan. This type of ISA or IRA rollover allows consumers to take advantage of plans that offer a higher rate of interest or some other benefit that helps them to build a larger nest egg over time.

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In most nations, a direct transfer is not considered to be a distribution; that is, moving the funds from one account to another qualified account does not constitute a disbursal to the account holder. For this reason, the funds involved in the transfer are normally not subject to any types of taxes or penalties that are associated with early distribution. Before initiating any attempt at a direct transfer, it is important to make sure the receiving account is qualified. In the event the two accounts involved in the transfer are not similar in nature, such as both being IRAs with a tax-deferred status, it is important to consult a financial professional who is up to date on current regulations that govern the operation of these plans.

For many years, a direct transfer could take several business days to complete. This was due to the need to fill out paperwork, forward the paperwork to the receiving account owner, then arrange for the orderly transfer. More recently, the use of electronic communication has made it possible to expedite the process, often to the point that the direct transfer can be completed in forty-eight to seventy-two hours after the request is initiated.

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