If you open a Roth IRA with one financial institution, you aren’t stuck with that same financial institution for the rest of your life. If you like another company’s fund offerings better, or if you simply find dealing with a different institution more convenient, moving your Roth IRA is a fairly simple process. You need to keep a few regulations in mind, but if you have any doubts, the bank or fund manager on either end of the transaction can walk you through the process.
The simplest way to move your Roth is to arrange for a direct transfer between financial institutions. Open an account at the new financial institution of your choice. You don’t have to make a deposit to open the account. Then tell the fun manager that you want to transfer your Roth from its old location to their institution. You’ll need to fill out some paperwork, but the fund managers take care of the rest. You can make a direct transfer as often as you like, whenever you like. You can even split an existing Roth between several institutions, or move part of the Roth to the new institution, while leaving the rest at the old institution.
With a rollover, the money from your Roth – both the principal you invested and any interest the funds have earned – come to you first. You then turn around and deposit the money in a new Roth account you open at a different financial institution. You’ll need to tell the bank or fund where the Roth was originally deposited that you’ll be rolling over the funds, otherwise they’re required by law to deduct a 10 percent penalty for early withdrawal. Again, you’ll need to fill out some paperwork, but the money should come to you right away. You then have 60 days to deposit the money in your new Roth account. You may only do a rollover of your Roth once every 12 months.
With a direct transfer, you never see the money. Everything takes place on paper. But despite the ease of the transaction for you, financial institutions aren’t always speedy about making the switch. You’ll need to monitor your new account and nag the fund managers involved if the funds don’t show up in the new account within three or four weeks. During the interim, you’re stuck with whatever interest rates the old institution is paying on your account, no matter what interest you might have earned at the new institution. If you make a rollover, you could be socked with a 10 percent early withdrawal penalty if you don’t make it clear to the original financial institution that you are withdrawing the funds from your Roth to roll them over into a new Roth. If you miss the 60-day deadline for redepositing the money in the new account, the IRS will slap you with a 10 percent penalty, and expect you to pay taxes on any of the interest the fund earned above what you originally deposited in the account.
Because you have 60 days between the time you receive the funds from your old Roth account holder and the time you deposit the fund in the new Roth account, you could conceivably give yourself an interest-free 60-day loan of that money. But using your retirement money for other purposes during that time period carries risk. If you miss the 60-day deadline by even one day you’ll be subject to penalties and interest. And while the money is in your hands, you don’t earn any tax-free interest on it. Also, if you lose the money because of bad investments, a lousy day at the track or a bad loan to your brother-in-law, you’ll still owe penalties and interest and you’ll be that much further away from the savings you need for retirement.
Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.