If you want to move a Roth IRA to a new broker, it’s important to make sure you understand the process. If you don’t follow the proper steps, you could face penalties.
How To Do a Direct Roth IRA Transfer
If you want to transfer your Roth IRA from one company to another, a direct transfer is likely the easiest path to take. With a direct transfer, you can move your assets straight to the new broker without having to sell them or deal with waiting on a check in the mail. Usually, the best way to start the process is to talk to the company to which you want to transfer your Roth IRA. Brokers want your business, so they have an incentive to make the process as easy as possible for you. Your new broker can tell you all the information that it needs and can help you work with your current broker to start the transfer process. In some cases, they’ll even communicate for you with the brokerage firm you’re leaving. You’ll need to provide some details and confirm with your old broker that you want the transfer to go through. Your old broker may also charge an account closure or transfer fee, so be ready to pay that.
60-Day Rollover Rules for Roth IRAs
The more manual process for transferring a Roth IRA is to take advantage of the 60-day rollover rule. According to this rule, you can take funds out of a Roth IRA and avoid paying penalties or taxes so long as you return the funds to a Roth IRA within 60 days. There is a limit of one rollover per year. To transfer your Roth IRA in this way, you can request a distribution from your old broker for the amount you want to transfer. The broker will send the funds to you by check or electronic deposit. However, there are risks to using this strategy. One is that it requires selling your investments. If the market spikes while the funds are uninvested, you’ll miss out on potential gains. Another is that if a check goes missing in the mail or some other emergency stops you from putting the money into a new Roth IRA within 60 days, you’ll face penalties.
Early-Withdrawal Penalties for Roth IRAs
In exchange for the tax incentives that they offer, Roth IRAs place restrictions on withdrawals before you reach retirement age. If you fail to complete your rollover within 60 days, the IRS will consider your withdrawal from the Roth IRA to be an early distribution. That means you can’t return the funds to the Roth IRA, missing out on future tax-free gains. You’ll also be subject to taxes and penalties. While withdrawals of contributions are tax-free, you’ll pay income tax on any earnings withdrawn, plus a 10% penalty on those earnings.
Five-Year Rule for Roth IRA Withdrawals
With Roth IRAs, there is a five-year waiting period before you can make withdrawals. This is true even if you’ve reached retirement age. You must have had the account for at least five years before you can begin making tax and penalty-free withdrawals. Withdrawals of earnings before you reach the 5-year minimum will be taxed, even if you’re past retirement age. The only exceptions are:
Withdrawing up to $10,000 for a first-time home purchaseWithdrawals to pay for qualified education, birth, or adoption expensesYou become disabled or dieWithdrawals to pay for unreimbursed medical expensesWithdrawals to pay for health insurance while unemployedSubstantially equal periodic payments
Roth Conversion Rules
If you have a pretax retirement account, like a traditional IRA or 401(k), it’s possible to convert some or all of that balance to a Roth IRA. This can let you take advantage of the tax-free growth Roth IRAs offer. Rules for converting to a Roth IRA are similar to those for completing a rollover. Failure to follow the proper process can result in penalties and taxes. The main difference to keep in mind is that you’ll owe income tax on the converted balance. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
