If you want to move your individual retirement account (IRA) balance from one provider to another, simply call the current provider and request a “trustee-to-trustee” transfer. This moves money directly from one financial institution to another, and it won’t trigger taxes. However, you must follow some rules to do it right. We’ll walk you through the direct IRA transfer process. To make sure you’re moving your savings to the right place, consult a financial advisor who can carefully analyze your situation.
The easiest types of transfers you can initiate in the retirement plan world are the ones involving the same type of account. So say you opened a traditional IRA with one financial institution, but you found a better option with another financial institution. Maybe they charge lower fees or provide better fund options.
The first step is gathering your current account information. So collect passwords, account numbers, statements and other materials. You should also gather information from the receiving financial entity such as their main address. You may need this when you contact your financial institution and request a trustee-to-trustee transfer or direct transfer. This ensures your money moves electronically from one financial institution to another without ever reaching your hands. As a result, you avoid tax consequences.
Otherwise, the bank or other entity may send you a check for the current balance, possibly triggering tax consequences. To avoid owing taxes and being penalized (if you’re younger than 59.5 years old), you must deposit the check in a different IRA account within 60 days of the check’s issue date. If you miss the time window, the IRS considers the amount sent to you as a distribution. If you’re under 59.5 years old, the distribution will also typically trigger a 10% early withdrawal penalty.
People who want to transfer their IRAs are often converting their IRA account to a Roth IRA. If you’re sticking with the same financial institution, you can simply contact it and request a conversion. However, the transfer amount will be reported as income, which you’ll have to pay taxes on.
Of course, this assumes that you funded your traditional IRA entirely with pre-tax money. It’s possible, though, to make after-tax contributions to a traditional IRA. This is known as a non-deductible IRA. In this case, you may not owe taxes when you convert it to a Roth IRA if you’ve had no gains. Or you’d owe taxes only on the gains and on the portion of your balance funded with pre-tax money. But the process also known as a backdoor Roth IRA conversion can be complex. We recommend you consult a qualified financial advisor when considering this move.
If the conversion tax seems too big to take on all at once, you can move your IRA balance into a Roth IRA in portions each year. That said, the Tax Cuts and Jobs Act (TCJA) reduced the tax rates for many Americans to major lows. They are scheduled to expire in 2025 or even sooner if political action scales it back, so you may want to convert as much as you can each year.
Another kind of IRA transfer, which is technically called a rollover, is when you move your 401(k) balance to an IRA. Typically, you’d do this after leaving a job. You can do so by contacting your 401(k) plan administrator and requesting a direct rollover from your 401(k) into an IRA of your choice. By using this specific language, you’re avoiding the same tax consequences mentioned above.
As mentioned before, in the retirement plan world, “rollovers” and “transfers” are actually different. The IRS generally defines a rollover as a movement of funds from a qualified plan that’s not an IRA, such as a 401(k), directly into an IRA. The process simply involves different paperwork, because you must report the move to the IRS.
In addition, you can perform an indirect rollover. In this case, your 401(k) plan provider sends you a check for your balance. You then have 60 days to deposit it into an IRA provider, or face tax consequences. The IRS permits you to perform indirect rollovers once every 12 months.
One exception to the IRS regulations is if your account has less than $1,000. If so, your employer will most likely close the account and send you a check for the total balance. This check will have already subtracted income taxes. However, the IRS will not impose its early withdrawal penalty if you deposit the money into another qualified retirement account within 60 days. If you don’t, the government will tax the money to the fullest extent: as income and as an early withdrawal if you are younger than 59.5.
While transferring a Roth IRA from one financial institution to another is a perfectly normal transaction, you can’t transfer Roth assets to a traditional IRA. Since you’ve already paid the taxes on the money you contributed to a Roth IRA, converting or transferring those assets to a traditional, pre-tax account isn’t possible. The IRS has a useful chart to help you visualize which types of rollovers are and aren’t allowed. As you can see, Roth-to-traditional-IRA rollovers aren’t permitted.
The IRS previously allowed for Roth conversions to be undone and reversed in case a taxpayer had second thoughts about their conversion or suddenly needed the money back that they paid in taxes, but the Tax Cuts and Jobs Act of 2017 banned the recharacterization of Roth conversions. Now, when you convert pre-tax contributions into Roth assets, the process is permanent and cannot be reversed.
The simplest kind of IRA transfer is a trustee-to-trustee or direct transfer. The involved financial institutions move the money between each other. You can request a direct transfer from an IRA to another IRA account or a traditional IRA to a Roth IRA account. To move funds from a 401(k) to an IRA, request a direct rollover. Again, the involved providers will shift the money between each other. By making a direct rollover or direct transfer between IRA accounts, you avoid triggering taxes. Before moving large balances or making other complex retirement planning decisions, though, you may be better off consulting a financial advisor first.
Photo credit: ©iStock.com/jxfzsy,/©iStock.com/designer491, ©iStock.com/ygallery
Javier Simon, CEPF®Javier Simon is a banking, investing and retirement expert for SmartAsset. The personal finance writer's work has been featured in Investopedia, PLANADVISOR and iGrad. Javier is a Certified Educator in Personal Finance (CEPF) and a member of the Society for Advancing Business Editing and Writing. He has a degree in journalism from SUNY Plattsburgh.
Read More About Retirement
More from SmartAsset
SmartAsset Advisors, LLC ("SmartAsset"), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S. Securities and Exchange Commission as an investment adviser. SmartAsset's services are limited to referring users to third party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States that have elected to participate in our matching platform based on information gathered from users through our online questionnaire. SmartAsset receives compensation from Advisers for our services. SmartAsset does not review the ongoing performance of any Adviser, participate in the management of any user's account by an Adviser or provide advice regarding specific investments.
We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors.
This is not an offer to buy or sell any security or interest. All investing involves risk, including loss of principal. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). There are no guarantees that working with an adviser will yield positive returns. The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest.
