When you open an individual retirement arrangement, a third party, such as a bank or broker, assumes the role of the trustee and physically takes possession of your retirement funds. Under federal tax rules, you can move your IRA money between trustees without restriction, although transfers in which you take possession of the funds are subject to restrictions and create tax complications.
The Internal Revenue Service does not restrict trustee-to-trustee transfers of IRA funds, because during these transfers, you do not gain direct access to your retirement money. These transfers take many forms, but in some instances the existing custodian may actually present you with a check that contains your IRA money. You cannot negotiate the check because the trustee makes the check payable to the new custodian rather than you, so you have to deposit the money into the new IRA account. Alternatively, the trustee may send the money directly to the new custodian. The money never leaves the IRA tax shelter during the transfer so you do not have to contend with tax consequences. You can conduct trustee-to-trustee transfers as frequently as you desire.
The IRS classifies the movement of retirement funds as a rollover rather than transfer if you physically take possession of the money. This occurs if your IRA custodian makes a disbursement check payable to you. Under federal tax rules, you have 60 days to invest rollover money into a new IRA before the IRS re-classifies the rollover as a taxable distribution. If you have multiple IRAs, you can conduct a series of IRA rollovers throughout the year but you cannot roll over the same IRA money more than once within a 12-month period. However, you can conduct a trustee-to trustee transfer with money that you rolled over within the past 12 months.
When you roll over IRA funds, you can instruct the custodian to give you the account proceeds in full. If you do not make such a request, then the custodian must withhold 10 percent of your disbursement to cover federal income tax. Some state governments also require IRA custodians to withhold money to cover state income tax. If your custodian withholds tax money, you have to replace that money with some of your other cash when you redeposit the money into a new IRA. You get the tax withholding back when you file your taxes unless you fail to roll over the money within 60 days, in which case you have to pay taxes on the withdrawal. In such instances, you may also have to pay a 10 percent tax penalty if you have not reached age 59 1/2.
When you roll over an IRA, your custodian has to liquidate your account holdings, which could lead to you having to pay redemption fees if your IRA holds mutual funds or account penalties if you hold a certificate of deposit or annuity. By comparison, trustee-to-trustee transfers not only provide you with the chance to move funds without restriction, you can also sometimes avoid paying fees because your custodian can conduct an Automated Customer Account Transfer of your IRA holdings. This involves your custodian sending your existing assets such as stocks, bonds and shares, to the new custodian as opposed to liquidating those assets and sending the cash. You cannot transfer some types of assets such as bank issued CDs in this manner, so you may incur some penalty fees even when you conduct trustee-to-trustee transfers.
- Cambridge Savings Bank: IRA Rollovers and Transfers
- Securities and Exchange Commission; Mutual Fund Fees and Expenses; August 2007
- Internal Revenue Service; Retirement Plans FAQs regarding IRAs; July 2011
- U.S. Securities and Exchange Commission. "Investor Bulletin: Custody of Your Investment Assets." Accessed July 28, 2020.
- The Clearing House. "The Custody Services of Banks," Page 16. Accessed July 28, 2020.