Investors undertake IRA transfers for various reasons. Excessive fees, a lack of flexibility, and under-performing investments are all reasons to transfer your retirement account(s) from one custodian to another. There are many benefits to executing a transfer as opposed to a rollover, including the ability to move your funds without having to inform the IRS or complete any extra paperwork when tax season arrives. There are some specific IRA transfer rules that you should be aware of, however, so as to not get yourself in hot water with Uncle Sam.
IRA Transfer Rules on Withdrawals
One of the most important rules for an IRA transfer is that you do not take any type of distribution. In other words, you do not take physical possession (or control) of the funds in the account, either in whole or in part. The best way to accomplish this is with a trustee-to-trustee transfer. This way there is not even any opportunity for you to take possession of the money. No distribution = no new income = no new tax obligation.
IRA Transfer Rules for Check Distribution
There are some situations where you might be transferring only a part of the money in your IRA account. In such cases, a direct trustee-to-trustee type of transfer may not be possible. This could occur if you have several different funds, each with some of your IRA money invested and you want to move one (or more) of them out in search of better returns.
When taking your IRA transfer via check, never have the check written in your name. Instead, instruct the current custodian to issue the check to the bank or other receiving institution. It should state something to the effect of “ABC Bank FBO Your Name IRA. The term “FBO” means “for the benefit of” and ensures you cannot cash the check or take possession of the funds.
Critical IRA Transfer Rules Exceptions
There is one situation which is considered a big exception to the standard IRA transfer rules discussed above. When you are transferring money from a 401(k) or other company retirement plan into a traditional IRA, this will be considered by the IRS as a distribution, regardless of whether or not you are able to work out a trustee-to-trustee transfer.
Having said that, you could still initiate a rollover once per 12-month period. However, you will receive Form 1099-R at the end of the year from the company you left and you will be required to report this as a rollover on your tax return, in addition to providing proof that the funds were reinvested.
Roth IRA Transfer Rules
The Roth is a special type of IRA in which taxes are paid up-front, allowing deposits to grow tax-free. Roth IRAs do have some special transfer rules depending on the type of transaction:
- Traditional IRA to Roth IRA – This is treated more or less as if you took a distribution. There will be tax consequences and they must be paid in the same year as the transfer.
- Account to account – There is no tax penalty for moving to another custodian, as long as your Roth IRA remains a Roth IRA.
- Normal transfers – As long as you have held the Roth IRA for a minimum of five years and are at least 59 ½ years old, there is no penalty to transfer money out of your account. It may be placed into whatever other account you desire.
New IRA Transfer Rules
Each year the IRS adds to, changes, and takes away from its long list of IRA transfer rules. The most common changes involve contribution limits and clarification of past policies. You can view new IRA transfer regulations for 2015 on this Janguard blog post page.
Get the Most out of Your IRA Transfer
Knowing and following the rules for IRA transfers will help to keep you on the good side of the IRS. The main thing to remember is that you should avoid taking a distribution or possession of any money in your IRA if possible. Also, be careful and consider seeking the advice of an IRA adviser when adjusting your IRA investments. Lastly, keep in mind that each retirement account is unique and investors are wise to contact Janguard directly for free help with IRA transfer paperwork and investment selection. You may contact us here or by calling us toll-free at 800.571.6341 for a free account evaluation as well as expert recommendations from our highly-trained staff of non-commissioned IRA advisers.