If you have a Roth IRA and want to transfer your account to a new custodian, taxes and penalties can be avoided if you follow some relatively simple rules.
To start, don't close out your old account before finding and making arrangements with a new custodian. That would result in receiving a distribution and could subject you to those taxes and penalties, particularly if you are younger than age 59½ or the Roth account hasn't been open for five years or more. Don't forget to also compare investment options, support, and fee structures if your accounts are with different brokerage platforms or banks before making the switch.
Among the options to accomplish the switch from one Roth account to a new one is by a direct transfer, which is the safest way.
Key Takeaways
- Roth IRAs can be transferred to a new custodian tax- and penalty-free if you follow IRS rules.
- A direct transfer between two custodians—or financial institutions—is the safest way to move Roth IRA funds from one Roth IRA retirement account to another.
- A transfer must be deposited in the new account within 60 days.
Direct Transfer
In a direct transfer, the current Roth IRA custodian, which is your financial institution, transfers some or all of the money in the account directly to a Roth IRA at another custodian. A direct transfer, also called a trustee-to-trustee transfer, isn't subject to taxes or penalties.
You can transfer a Roth IRA from one provider to another without any costs. It is crucial to transfer the Roth IRA money to another Roth IRA, not to a traditional IRA or some other type of account. In general, it is usually best to have the receiving custodian initiate the transfer. You can ask your current financial institution to make the payment directly to the new Roth IRA.
The type of assets held in a Roth also will affect the process. The receiving custodian typically will ask you to indicate whether the assets should be transferred in-kind or, if non-cash assets, liquidated and then transferred. For example, proprietary investments, such as proprietary mutual funds, held in your old Roth account can't be transferred to the new financial institution. Shares in such funds will need to be liquidated and the proceeds reinvested once they are transferred to the new Roth IRA.
Most financial institutions use the Automated Customer Account Transfer Service (ACATS) electronic system to transfer money between accounts. That generally takes about a week.
Buying or selling any securities in the account while the transfer is in progress is likely to complicate and delay the process.
Distribution to the Account Holder
Another option—albeit a riskier one—is to ask for a check from your existing custodian, but this makes it your responsibility to deposit the money into a new Roth account. In this scenario, the Roth IRA custodian liquidates the assets and either mails a check made out to you or deposits the funds directly into your personal bank or brokerage account.
You can also have a check made payable to your new custodian. For example, if Charles Schwab is your new custodian, you can have the check made payable to Charles Schwab FBO (for the benefit of), then list the beneficiary. This ensures that you don't have the ability to directly receive the funds.
Abide by the 60-Day Deadline
In order to be considered a tax-free rollover to a new Roth IRA, the money must be deposited in that Roth IRA account within 60 days after you receive the funds. If the 60-day deadline is missed, the withdrawal will be considered a distribution of the assets, and some of it may be subject to income tax as well as a 10% early withdrawal penalty.
Roth contributions can be withdrawn penalty- and tax-free at any time, but their earnings are tax-free only under certain conditions. For example, the withdrawal must be made at least five years after the Roth account was first opened, and the owner must be at least age 59½.
If you do decide to do it yourself, make sure to document the process. If the IRS questions the transfer and you can’t prove you deposited the money in your new Roth IRA within 60 days, you'll get stuck paying taxes and penalties on it.
What Is a Direct Transfer?
A direct transfer, also known as a trustee-to-trustee transfer, is when a distribution from a Roth IRA, or any retirement account, isn't paid directly to you. Instead, the financial institution holding your existing Roth IRA makes the transfer directly to your new Roth account. A direct transfer is the easiest way to avoid taxes and early withdrawal penalties.
What Is an Early Withdrawal Penalty?
You can withdraw earnings from a Roth IRA without owing taxes or penalties when you are age 59½ or older and if the account is at least five years old. This is known as the5-year rule. In general, if you don’t follow these rules, the early withdrawal penalty is 10% of the amount withdrawn. You may also owe income tax in addition to the penalty. You can withdraw contributions from a Roth IRA at any time.
How Much Can I Contribute to a Roth IRA?
In 2024, the annualcontribution limit for Roth and traditional IRAsis $7,000 (or $8,000 if you're 50 or older). However, if you earn more than the income limits imposed by the IRS, you aren't eligible to contribute to a Roth IRA.
The Bottom Line
It's possible to move your money from one Roth IRA custodian to another. As long as the money goes into another Roth account and no distribution is made to you, the transfer won't be subject to taxes or penalties. It's best to do it through a direct transfer to the new custodian, so you won't risk missing the 60-day deadline.
