Individual retirement accounts provide important tax benefits to encourage savers and investors to sock money away for their later years. For example, investments grow tax-free while parked inside an IRA. A trustee or custodian is responsible for ensuring that the IRA observes all the rules. You can move an IRA account to a new custodian through a transfer or a rollover.
A custodian is responsible for the administration of your IRA. A trustee is pretty much the same as a custodian, except the trustee can make investment decisions for the IRA owner. The Internal Revenue Service requires a custodian or trustee to be a bank, savings and loan association, federally insured credit union or other approved entity such as a mutual fund company. Custodians make sure you don’t kick in more than allowed by IRS regulation. At the start of a new year, custodians prepare IRS Forms 1099 and 5498 disclosing your previous-year distributions and the IRA’s fair market value as of the end of the previous year.
Reasons to Change
Mutual fund companies often serve as IRA custodians. You might want to move your IRA to a new mutual fund family for a number of reasons, including lower fees, better returns and offerings that are more interesting. For example, if your IRA custodian is a bank, you might be limited to savings products unless you move your IRA to a broker or mutual fund company. In addition, some custodians limit your choices. You might want to pick a new custodian if your current one doesn’t allow you to buy precious metals or real estate in your IRA. Normally, you don't need to change custodians if you simply want to convert a traditional IRA to a Roth, or vice versa.
The simplest way to move an IRA to a new custodian is to request a trustee-to-trustee transfer. This transfer is tax-free because the IRS doesn't consider it a distribution. Also, the 60-day deadline for an IRA rollover doesn’t apply to transfers. You can request trustee transfers as often as you like -- there are no waiting periods. You can transfer cash and property, including stocks, bonds and fund shares from one IRA to another. If the transfer is a result of a divorce, it must be executed through a trustee transfer. Or, if you want to keep the same custodian, you can simply change the name on the IRA.
You can change custodians by siphoning the cash and property out of your old IRA and depositing it into a new IRA. The IRS calls this a rollover. To avoid taxes and possible early-withdrawal penalties, you must complete a rollover within 60 days. You usually can make only one rollover per 12-month period, unless it's required because the custodian goes bankrupt. You can roll the same property from one IRA to another. If you contribute less to your new IRA than you took out of your old IRA, the shortfall might be taxable income, depending on the types of IRAs involved.
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