What to know when considering an IRA rollover

Do a transfer instead.

That’s correct, if you are wanting to move your existing IRA account to a different IRA account at another institution you should execute a trustee to trustee transfer not a rollover. First step would be to open a new IRA account and then ask that firm to help you complete a transfer. A transfer has to be initiated from the receiving company. There are two types of transfer, an ACAT transfer and a non-ACAT transfer. An ACAT transfer is a transfer using the ACAT system which allows you to move securities (stocks and bonds) direct from one brokerage company to another without selling them first. This can save you money on trading fees. If you had to liquidate all of the securities and then buy new ones in your new account that could be expensive and unnecessary if you can use the ACAT system. The new brokerage where you want to receive your funds will help you to initiate this process. ACAT transfers are typically faster as well, normally taking anywhere from 3-10 days to complete and residual dividends will automatically sweep over to the new account. All other transfers would be completed using a non-ACAT. For instance, lets say you have an IRA CD at a bank and are moving it to a brokerage firm to invest in bonds. You fill out a form from the brokerage company requesting the transfer from the bank. Give the form to the bank and they liquidate the CD and send a check directly to the brokerage company.

Why do a transfer instead of a rollover?

Rollovers come with restrictions and added risk. For instance, you can only do 1 rollover per 12 months. Doesn’t matter if you have 10 different IRAs, once per year period. Rollovers are different from transfers in that the IRA gets liquidated and a check is made out to you the account owner. You then have 60 days to put it back in a an IRA account. If that doesn’t happen or is 1 day late you get taxed and penalized on the entire amount which could be a substantial hit to your retirement savings and taxes for the year. There have been cases where investors have tried to complete a rollover within the 60 days but missed by a few days because of a processing error and been penalized. Unless you are doing a rollover because you need to borrow the funds for a true emergency, stick with transfers.

You can’t roll a traditional IRA directly to a Roth IRA. This question comes up a lot and the term you are actually looking for is conversion. Traditional IRA and Roth IRA are two different account types with different tax structures. An IRA is tax deferred where as a Roth contains after tax contributions that grow tax free. Therefore, you can’t just roll over funds between the two. To complete a conversion you’ll need to first open a Roth IRA and then fill out a conversion form to move the funds from the Traditional IRA to the Roth. Keep in mind the entire amount of the conversion will be considered ordinary income in the year in which you complete it for tax purposes. Typically, investors with large IRA accounts will spread conversions to Roth accounts over a period of several years to ease the tax burden. If you have 100k in an IRA you want to convert try doing it 20k at a time over a period of 4 years so you don’t incur a huge tax hit in one year. Or consider doing a conversion when the market is down significantly and moving the positions in kind.

Do your research before choosing where to open your new IRA.

There are many different IRA custodians and brokerage firms that will offer IRA accounts so it pays to spend time researching different options before you make the move. First, you should consider what type of investments you want to make with your funds. You have many options; real estate, stocks, bonds, CDs, gold and silver and more. If you’re an accredited investor you have even more options such as private funds, private equity, hedge funds, private stock etc. Not all IRA custodians offer all investment options so you should plan that part first and it will narrow your list of options. Next, you want to review the custodians fee schedule so you know what it costs. Some charge annual custodial fees others don’t, it really depends on the type of custodian and investments your wanting to put in your IRA. You should also do a little research on the company itself to make sure they are a solid company and are not going to go out of business overnight. Finally, get a sense for the level of service and professionalism of the custodian, call them a few times before you open an account and ask lots of questions. This will help you gauge what they are like to work with and if they can provide you with accurate answers to your questions. The last thing you want is to have your funds with a company that can’t provide timely and accurate service, it will save you many headaches in the future.

The financial industry and IRA providers are vast and complex. It can certainly pay to work with a professional to help save you from costly mistakes or just make things much easier and take the burden off your shoulders. If you prefer to do it yourself make sure you spend some time doing research first. For all the details pertaining to IRAs and rollovers you can visit the IRS website, they publish all regs and guidelines for everyone to view.