How to Transfer Mutual Funds to a Roth IRA

How to Transfer Mutual Funds to a Roth IRA
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A Roth IRA is a retirement account that you set up and manage to help save money through tax breaks. The contributions you make to a Roth IRA do not result in a tax deduction, but the money grows tax-free and you can withdraw the entire amount, including earnings, tax-free at retirement. The only mutual funds eligible to be directly transferred into a Roth IRA are those that are in another qualified retirement account such as a 401k, traditional IRA, or Roth IRA. If you have money in a mutual fund that is not in a qualified retirement account, you would have to cash out the mutual fund before contributing the money to a Roth IRA.

Roth IRA Transfers

Determine how much of your mutual fund you want to move to a Roth IRA account. If you are moving an investment, such as a mutual fund, rather than changing investments, most likely you are doing so to reduce administrative fees, so you would probably want to move it all at once. However, you do not have to.

Set up a new Roth IRA account or look up the account number on an existing Roth IRA that you have. You will need this information to request the transfer.

Inform the financial institution with which you have your mutual funds that you want to transfer them to your new account. Request the appropriate paperwork. Each financial institution will have its own form, but you will always need to provide your identifying information and account numbers.

Wait for the money to be automatically transferred to your new account. This should take only a few days, but may vary depending on your financial institution.

Conversion to a Roth IRA

Determine if you are eligible to convert the retirement plan that holds the mutual funds to a Roth IRA. If you have mutual funds in a 401k plan, traditional IRA, or other qualified retirement plan, you can directly convert them into a Roth IRA. As of 2010, the IRS does not impose any income restrictions on who can convert money into a Roth IRA. If the mutual fund is not in a qualified retirement account, you cannot move it to a Roth IRA.

Contact your financial institution and inform it that you want to directly convert the money from your other qualified plan to your Roth IRA.

Wait until the end of the year to receive a 1099-R form from your financial institution indicating the amount you rolled over.

Report the amount of the conversion from a non-Roth retirement account to the Roth IRA on your taxes as a taxable distribution and indicate "rollover" next to it. For 2009 tax returns, this is line 15a and 15b on your form 1040. You must include the amount as part of your taxable income because you received a tax break on the contributions. Because it is now in a Roth account, you will not have to pay taxes when you withdraw it.