Can I Change Funds in a Roth IRA?

Can I Change Funds in a Roth IRA?
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The year 1997 saw the birth of a different sort of individual retirement account. Named after the Delaware senator who sponsored the enabling legislation, the Roth IRA differs from its traditional counterpart in a significant way: it is funded with after-tax dollars, or income subject to taxation prior to its deposit into the account. By contrast, traditional IRAs receive tax-deductible income that is sheltered until withdrawn from the account.

The advantage to the Roth IRA is that there is no tax on withdrawals. So, those who expect higher taxes in retirement have an incentive to invest in the Roth. Most financial institutions offer both IRA options.

What Goes Into an IRA?

Owners of individual retirement accounts make their contributions with liquid funds. This means deposits must be in cash or transferred from a cash-ready account, e.g. checking or savings. These monies can be invested in a variety of assets including stocks, bonds, mutual funds, certificates of deposit, money market funds and exchange-traded funds.

The breadth and diversity of these investments largely depend on the bank or financial service provider with whom the account is opened. The IRA grows through compounding interest, whether or not a contribution is made in any given year.

Does the Institution Disclose the Investments?

The monthly IRA statement will reveal some basic information like the current balance as well as an itemization of contributions and withdrawals. Included with this information is a list of "holdings." These are the assets in which the IRA is invested.

The statement will indicate the asset class of each investment, equities, fixed income and cash equivalents, for example. Additionally, it will show how funds are allocated among the classes. Just as important, the statement then itemizes specific assets, their current value and any change from the previous month. In this way, account holders can monitor the performance of the Roth IRA.

Roth IRA Change Investments

A holder can indeed sell mutual funds in a Roth IRA or otherwise make changes to the investments that comprise it. Neither selling the fund nor pocketing the profits has any tax consequences as long as it complies with IRA rules. One consistent requirement is that the IRA must have been held for ​five years​ before any distribution can be made tax-free.

Often, brokerage accounts authorize a financial advisor to make decisions regarding the contents of the IRA portfolio. It is always prudent to consult trusted experts before moving things around.

What Other Changes Are Allowed?

Many who open a Roth IRA with one financial institution may be interested to know that they are not stuck there. Transferring the account to a new custodian can be done without incurring taxes or penalties. Still, this must be accomplished carefully.

For one thing, it may not be transferred into another kind of account; this is an apples-to-apples conveyance. Furthermore, no distribution can occur during the transfer of the account, neither may any assets be bought or sold until the turnover is complete. Making arrangements with the new custodian should always precede notifying the old one.

Holders can also change the beneficiaries of an inheritable account without financial detriment. However, following the custodial institution's rules in this regard is crucial. Almost always, there will be a designated form to complete for this purpose. Correctly naming the intended beneficiaries and their intended percentages is also crucial for the custodian in the event of the passing of the account holder. There is also an option to name contingency beneficiaries if the primary beneficiaries do not survive you.