A Roth IRA is an individual retirement savings platform that offers potentially significant advantages over a traditional IRA. The rules surrounding transactions with a Roth IRA closely mirror those of the traditional counterpart, but some differences exist. Understanding federal legislation regarding the transfer of Roth IRA plans ensures that your money will safely move from one custodian to another without the possibility of unnecessary taxes, penalties or other complications.
From Group Plan to Roth IRA
If you participated in your former employer’s group retirement plan, such as a SIMPLE IRA or 401k, you may transfer that account balance into a Roth IRA. Once your Roth IRA is opened, transfer paperwork must be completed to instruct your old employer’s retirement plan provider to send your account value to your new custodian. Choosing conversion to a Roth IRA as part of this process is completely acceptable and legal. Your new Roth IRA custodian will handle all calculations and separate the portion of your account necessary to pay the taxes due as a result of this conversion.
From Traditional IRA to Roth IRA
Very similarly to the process of converting an old group retirement plan to a Roth IRA, existing traditional IRAs may also be altered in the same manner. Your current traditional IRA can transfer to a new custodian and be converted to a Roth IRA in the process. Alternately, your present traditional IRA custodian may possess the capabilities to make this change without the need to open a new account with another provider. Converting from a traditional IRA to a Roth IRA may result in additional tax liability. American Funds explains, “the taxable portion of the converted amount will be treated as taxable income.” However, for conversions made during 2010, the IRS offers taxpayers an option to spread the additional tax liability over 2011 and 2012.
From Roth IRA to Roth IRA
If your experience with your current Roth IRA custodian has been less than satisfactory, transferring your account to another provider requires minimal time and effort. After initiating the process of opening a new Roth IRA account elsewhere, completed transfer paperwork will instruct your current custodian to transfer your account balance. You can even move your account without making investment allocation changes if the new custodian is an independent brokerage firm. However, if your new account is opened directly with a mutual fund company or insurance carrier, your overall asset allocation may remain intact but the actual fund names and their composition may differ.
Money within a Roth IRA must remain in a Roth IRA. Current IRS regulations prohibit the transfer of Roth IRA values into other types of qualified retirement plans like traditional IRAs or 401ks. Since Roth IRA contributions do not result in ordinary income tax deductions, and traditional IRA contributions can be deducted, the notion of changing the status of Roth IRA money would create significant confusion and complication. For this reason, such reverse transfers cannot be implemented.
Transfer versus Rollover
Moving money from one retirement account to another, while essentially a simple process requiring little more than the completion of some paperwork, actually falls into two categories, regardless of the originating or receiving account types. When money is sent directly from one retirement account custodian to another, that process is defined as a “transfer.” However, some custodians will instead affect a transfer by mailing you a paper check for the full value of your retirement account. Your responsibility is to forward that check to your new retirement plan custodian. This process is defined as a “rollover.” If you receive a check from one IRA custodian and fail to deposit the money into a new IRA within 60 days, IRS regulations assume you decided against the rollover, resulting in additional income taxes due and potential penalties for early withdrawals.
Gregory Gambone is senior vice president of a small New Jersey insurance brokerage. His expertise is insurance and employee benefits. He has been writing since 1997. Gambone released his first book, "Financial Planning Basics," in 2007 and continues to work on his next industry publication. He earned a Bachelor of Science in psychology from Fairleigh Dickinson University.