Remember, in order to transfer money from one retirement account to another, both accounts need to be of the same type. For example, you can transfer money from a traditional IRA to a traditional IRA, or a 401(k) to a 401(k), but if you lose your job and want to consolidate your 401(k) savings into an IRA, that requires a rollover, not a transfer.
Transfers are sometimes called trustee-to-trustee or custodian-to-custodian transfers because the money is sent directly from the administrator of one retirement account to the administrator of another.
One of the biggest differences between transfers and rollovers has to do with taxes. As we explained, with indirect rollovers, the IRS requires that a percentage of your funds be withheld for tax purposes. And if you don't re-invest the rollover distribution within 60 days, you have to pay income taxes on the funds, plus an early withdrawal penalty if you are younger than 59½. When you conduct a transfer, however, the money is never in your hands, so the IRS has no right to withhold taxes or charge early withdrawal penalties.
Even better, the IRS doesn't have to know about retirement account transfers. With rollovers -- both direct and indirect -- the IRS requires taxpayers to report the rollover distribution on their 1040 income tax form, even if no taxes are owed. That's not the case with transfers. You can move large sums of money from one IRA to another and you don't even have to mention it to Uncle Sam [source: Charles Schwab].
There are also no restrictions on how many transfers you can do in the same year. With rollovers, you are limited to one rollover every 365 days, but you are free to make as many IRA-to-IRA or 401(k) to 401(k) transfers as you want.
Now it's time to answer the million-dollar (you wish) question: When does it make the most sense to do a transfer, a direct rollover or an indirect rollover? We'll share some tips on the next page.