How to transfer an IRA from one institution to another
Learn how to transfer an IRA from one institution to another using either a direct rollover or indirect rollover, and the steps involved.
If you found an IRA institution with better investment options or lower fees, you might consider moving your IRA to the new IRA institution. Transferring an IRA from your current provider to another institution can be done through a direct trustee-to-trustee transfer. Alternatively, you can opt for an indirect rollover where your bank or broker sends you a check, which you must deposit to the new IRA institution within 60 days.
A direct trustee-to-trustee transfer is the best way to transfer an IRA from one institution to another since the process is handled by the institutions involved and it does not trigger taxes. Start by opening an IRA account at the new institution, and contact the original and the new IRA providers to initiate the transfer. You will be required to submit the required paperwork, and once approved, the old IRA institution will transfer the money to the new IRA institution.
IRA to IRA Transfers
If you have a traditional IRA and you found a better IRA provider for the same type of account, it is easier to make the transfer without triggering a taxable event. The main methods of IRA to IRA transfers include:
A direct rollover is also known as a trustee-to-trustee transfer, and it is less prone to mistakes since you never get your hands on the money. The majority of the process is managed by the two institutions involved, and it requires the least work from you.
A direct rollover works as follows:
Set up an IRA
If the new institution allows online registration, simply download the required paperwork for opening an IRA account at the institution. Provide the required information, sign the paperwork, and submit it to the IRA provider.
You may also need to select your preferred investment, and state the initial contribution.
Contact new IRA provider
You should talk to the new IRA provider to let them know that you want to move your IRA to their plan. Since the institution has the incentive to make you their customer, they will be willing to walk you through the process to transfer the IRA account.
Contact original IRA provider
You should also contact the original IRA provider to confirm the transfer to a new IRA. If you want to retain your investment profile, you can request an in-kind transfer of your investments to the new provider. Otherwise, if you want to invest in different classes of investments, ask the trustee to liquidate the investments and transfer the proceeds to the new IRA account. The new provider will work directly with the original provider to facilitate the funds transfer.
After providing the required information, the transfer can take anywhere from 5 days to three weeks. If you have not received a confirmation of the transfer after the lapse of this period, you should contact both IRA providers to find out the reason for the delay and when the transfer will be completed.
An alternative to a direct rollover is an indirect rollover, where you go in between. Unlike a direct rollover, funds transferred via an indirect rollover first go through you. The original IRA provider closes the IRA account and sends you a check with your IRA balance, and you must deposit the check to the new IRA provider.
Here are the steps involved with an indirect rollover:
Set up a new IRA
Download or pick the IRA opening forms and provide your personal information such as name, address, social security number, date of birth, and other information required. Sign the registration forms, and submit them to the new IRA institution.
Contact the original IRA provider
You can call or email the IRA provider to let them know that you want to rollover your IRA to another institution. You will be required to fill up closing forms and pay a closing fee if needed. If your funds are held in investments, they must be liquidated since they cannot be transferred in kind.
You should inform the IRA provider that you are rolling over your IRA funds into another institution so that they do not withhold funds to pay taxes and penalties. Ask the provider what is needed to prevent withholding.
If you are transferring the full balance, the IRA provider will close the account and send you a check. The money can also be sent electronically to your bank account. Make sure to provide the correct bank account details, including the account number and routing number.
Submit check to the new IRA provider
Once you have received the check, you should deliver it to the new IRA institution as soon as possible. You can deliver the check by hand or by mail within 60 days of issue to avoid triggering taxes and penalties.
If you miss the 60-day deadline, the transferred funds will be considered a distribution, and you will be taxed at your tax bracket. If you are below 59 ½, you will also be charged a penalty tax for early withdrawals.
IRA to Roth Conversion
Apart from IRA to IRA transfers, you can also opt for an IRA to Roth IRA conversion. When you convert a traditional IRA to a Roth IRA, there will be a tax bill, possibly a large amount, but after the conversion, you won't be required to pay taxes or penalties when you take a distribution from the Roth account in retirement.
IRA to Roth conversion also changes how your retirement savings are taxed. You move from a tax-deferred traditional IRA to a Roth IRA’s post-tax contribution tax treatment. You must pay taxes on the accumulated investment gains and contributions you took a tax deduction for in previous years.
Here are the steps involved when converting an IRA to Roth IRA:
Calculate your tax liability
Since a Roth IRA is funded with post-tax dollars, you will need to calculate the tax liability that arises when you transfer your IRA funds. If your traditional IRA contributions were deducted from your paycheck as pre-tax income, it means they were not taxed. Hence, when you convert the IRA to Roth IRA, you will need to pay taxes on these accumulated contributions and investment earnings based on your current tax bracket.
Confirm you can make a direct transfer to Roth IRA
Usually, you can transfer an IRA from one IRA provider to a Roth IRA in another institution using the same procedure as IRA to IRA transfers. You should contact the original and new IRA providers to confirm that you can make a direct transfer.
Some IRA providers only allow indirect transfers either electronically to your bank account or via check. Once you receive the money, you must deposit it into the new Roth IRA account within 60 days. If you delay in depositing the funds to the Roth IRA account, you will be required to pay additional taxes and penalties.
Report transfer on Form 8606
When filing your tax return for the year, you should report the conversion in form 8606. The untaxed portion of the traditional IRA transferred to the Roth IRA is taxed at your tax bracket.