Buzz
If you're considering transferring an IRA, it could be due to finding a bank offering better rates, wanting to streamline your finances, or if your broker changes firms. While transferring involves attention to detail, it's a straightforward process. Open an IRA account with the new bank, complete a transfer instruction form, then wait 3 to 5 business days for the transfer to complete. If you're converting from a traditional IRA to a Roth IRA, additional steps are required to manage tax liability.
Steps
Opening a New IRA
Decide between a traditional IRA and Roth IRA. If you don't already have another IRA with a different institution, you'll need to open a new account before transferring. Your overall financial plan should guide your choice of IRA.
- If you currently hold a Roth IRA, you'll need to open another Roth IRA with the new bank. A Roth IRA can't be transferred or rolled over into a traditional IRA.
- If you currently possess a traditional IRA, opening a traditional IRA with the new bank is likely the best option, especially if you're in a higher tax bracket or nearing retirement. Contributions to a traditional IRA are tax-deferred, and you'll pay taxes on distributions after retirement, likely at a lower tax rate.
- If you're in a lower tax bracket now but anticipate a higher tax rate in retirement, opening a new Roth IRA might be preferable. Contributions to a Roth IRA are taxed at your current, lower tax rate, and you won't owe taxes on distributions during retirement, even if your tax rate is higher.
- Remember that transferring untaxed funds from a traditional IRA to a Roth IRA incurs taxes. If your current tax rate is below 20%, but you expect it to rise to 25% in retirement, paying taxes on a Roth conversion may save money in the long term.
Find a provider offering low fees and diverse investment options. Research online reviews and consumer reports. Select a new bank with minimal or no annual fees, cost-effective investment choices (such as mutual funds without transaction fees), and exceptional customer service.
- Some banks may match contributions for a limited period (e.g., the initial 3 years) or provide other incentives. Ensure these benefits aren't outweighed by high portfolio management fees.
- Even a slightly higher ongoing fee can result in thousands of dollars in costs over your IRA's lifespan.
- Also, verify the minimum investment required before committing to a financial institution.
Inquire about transfer fees from your current and potential new providers.
Both banks will impose transfer fees, which they must disclose upfront. When exploring options, compare the fees of potential providers. Ask your current bank for its fee structure and assess whether the switch is financially viable.
- For example, a new bank might offer lower portfolio management costs, justifying the payment of transfer fees in the long run.
Ensure the transferability of your assets. Check with potential new providers to identify any non-transferable assets. If an asset can't be transferred, you may need to liquidate it, incurring tax liabilities. While you can leave non-transferable assets with your current bank, inactivity may result in fees.
- Non-transferable assets could include securities exclusive to your current firm or mutual funds unavailable at a new firm.
- If you have significant non-transferable assets, liquidating them could push you into a higher tax bracket. Leaving them in an inactive account may become an unreasonable expense. Consider reconsidering the transfer or finding a firm that facilitates it if necessary.
Discuss with your broker if they're transitioning to a new firm. When brokers or financial advisers change companies, they may request clients to transfer accounts to their new employer. Ensure that switching firms aligns with your financial goals.
- Inquire about the reasons for the move and whether there are incentives for transferring accounts. Review rates, fees, and other financial inducements to switch. Confirm the transferability of your assets as well.
Contact the new bank to initiate a new account. Once you've selected a new bank, visit their website, call them, or visit their branch to open a new IRA account. The process is straightforward and akin to opening a regular bank account.
- You can't commence a direct transfer without first establishing an account with the new institution.
Executing a Direct Transfer
Opt for a transfer instead of a rollover. Upon establishing the new IRA, transfer your old IRA directly to the new account. In a transfer, funds move directly from the old institution to the new one and are not subject to taxation.
- If you choose to roll over funds, your old bank issues you a check, and you have 60 days to deposit the funds into a new IRA. Failure to meet the deadline results in reporting the entire amount as taxable income. Additionally, if you're under 59 1/2 years old, you'll face an extra 10 percent penalty.
Discuss potential investment fund reallocation with your new bank. An IRA functions more like a savings account for investments rather than an investment itself. Consider reallocating your investments after switching banks. Seek advice from your broker or investment adviser regarding any necessary portfolio adjustments.
- For instance, your new bank might offer broader investment options with higher annual returns and lower or zero transaction fees.
- Ensure you transfer the entire old IRA to avoid tax liability. You cannot withdraw cash from the old IRA, transfer the remainder, utilize the withdrawn funds to acquire new assets, and then deposit those new assets into your new IRA account without incurring taxes and penalties based on your current tax bracket.
Submit a transfer instruction form (TIF) to your new bank. Complete a TIF to initiate the transfer process. You can electronically submit the form through your new firm's website. Provide your personal details, old account information, transfer amount, transfer date, and other necessary information.
- In cases of divorce, you may need to transfer a portion of an IRA to a new account in either your or your former spouse's name. Specify the transferable amount rather than the IRA's total value.
Monitor progress with both banks throughout the transfer. Upon TIF submission, the new bank requests a transfer from the old bank. The old bank furnishes a list of assets to the new one, which then approves the transfer.
- The transfer typically takes 3 to 5 business days. During this period, periodically contact both banks to track progress.
- The transfer may only be declined if your assets are non-transferable or fail to meet your new firm's policies. If you confirmed the transferability of your assets beforehand, you shouldn't encounter complications.
Review your statements post-transfer. Upon completion of the transfer, await your new firm's initial monthly statement. Compare it with your last statement from the previous bank to ensure accuracy. If discrepancies arise, contact both banks for clarification. If needed, escalate the matter to the compliance directors or the Securities and Exchange Commission at https://www.sec.gov/ for resolution.
Managing a Roth Conversion
Assess your tax obligations before transferring funds to a Roth IRA. Evaluating your tax liability before converting a traditional IRA to a Roth IRA is crucial. While converting can be advantageous in certain situations, it's unwise if it would elevate your tax bracket without adequate funds to cover the tax increase. Ensure you understand the tax implications, especially if your contributions to the traditional IRA were deducted from your pre-tax income.
Confirm direct transfer eligibility to a Roth IRA. Verify with both your old and new banks if direct transfer of funds from a traditional IRA to a Roth IRA is feasible. Some institutions may require an indirect transfer or mailing a check. If a check is issued, ensure timely deposit into your new Roth IRA to avoid tax penalties.
Report the transfer on your subsequent income tax return. Use form 8606 to report the conversion on your next tax return. Any untaxed portion of your traditional IRA transferred to the Roth IRA will be subject to taxation based on your current tax bracket. Additionally, be prepared to start paying estimated taxes in advance upon conversion.
