Where Can I Move My IRA Without Paying Taxes?
Direct transfers allow you to move your IRA without paying taxes, with detailed rules and regulations for every step in the process. Therefore, it’s essential that you fully comprehend this transaction process before initiating one.
An Individual Retirement Account (IRA) is a tax-sheltered savings account managed by banks, brokerage firms, mutual fund companies or insurance companies and provides tax deferral until money is withdrawn from it. IRAs can be used as investment accounts that grow with your investments over time without incurring penalties at withdrawal time.
Trustee-to-Trustee Transfers
When moving funds from a retirement account held by your former employer to an IRA at another financial institution, it’s vitally important that they’re transferred within 60 days or risk becoming taxable and possibly subject to a 10% penalty, depending on their circumstances. If they pass beyond that deadline, distribution becomes taxable with possible hefty tax bills due and penalties as high as 10% being assessed against any missed distribution.
An easy and straightforward way to move money between different IRAs is through a trustee-to-trustee transfer or direct rollover, where financial institutions directly transfer the funds between themselves instead of sending you a check and then passing it onto your new custodian.
Trustee-to-trustee transfers can be completed between different traditional IRAs or between Roth IRAs and traditional IRAs without inconveniencing the IRS – meaning you will not receive Form 1099-R for tax time reporting purposes. Unfortunately, they can only be done once every year, which could make things difficult if your financial institution or investment options change suddenly.
Same Trustee Transfers
Both trustee-to-trustee transfers and direct rollovers allow you to move an IRA from one institution to the other, but with direct rollover you don’t actually take possession of your money; rather, your current retirement plan sends the check directly to your new IRA custodian.
This method is faster than its indirect rollover counterpart and doesn’t require waiting 60 days for distribution checks to clear, yet still must adhere to IRS guidelines – working with a financial advisor may prove invaluable in this instance.
Another method for moving an IRA without incurring taxes is through indirect rollover, in which funds are taken directly out and then returned within 60 days – although this method takes more time, its limit does not exist and avoids withholding taxes, so it may be more suitable in certain instances.
Direct Transfers
There are two primary methods for moving money between retirement accounts: transfers and rollovers. Transferring involves moving funds from one financial institution to the next; in contrast, rolling over refers to moving your retirement savings from an old employer’s plan (e.g. 401k, 403b, 457 or Thrift Savings Plan) into an IRA account.
When switching IRA custodians, direct transfers may allow you to avoid taxes. With direct transfers, financial organizations send a check made out directly to your new custodian or trustee which you deposit directly with the new account – thus bypassing mandatory tax withholding requirements.
Direct rollovers require more work on your part but allow you to bypass both income tax withholding and penalties. In order to avoid tax penalties, however, this transaction must take place within 60 days or else it will be treated by the IRS as early withdrawal and penalty fees will apply.
Rollovers
Rollovers are a special form of distribution used to transfer funds between employer plans and IRAs without incurring taxes, typically by moving funds direct or indirectly. There are two types of rollovers: direct and indirect.
Direct rollover allows your former plan administrator to send the distribution directly to your new IRA custodian, making this an efficient way of moving money between accounts.
An indirect rollover requires you to personally take a check for the full distribution and deposit it within 60 days into your new retirement account, otherwise the IRS taxes those pretax contributions and earnings as regular income.
Before making changes to your retirement accounts, it’s advisable to seek advice from a tax professional. Also consider whether transferring it into an investment company or robo-advisor which manages it automatically and can rebalance it at lower costs than human advisors – just be careful not to exceed the IRS maximum limit on what can be rolled over per year!
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