An individual retirement account is a reasonable place to sock away some of your retirement money. IRAs give you a lot of flexibility in how your retirement dollars are invested. You can go from buying high-risk, high-reward individual stocks to moving your funds into a money market account insured by the Federal Deposit Insurance Corporation. How you move your funds from one type of investment to another depends on your IRA custodian.
Custodial or Trust Accounts
The Internal Revenue Service requires that all IRA accounts be held in either a custodial or trust account. Any entity or organization approved by the IRS can act as a trustee or custodian, but the most common are banks, credit unions, savings institutions, insurance companies, mutual funds and investment brokerage companies. You're not limited to a single custodian or trustee. You can have as many IRA accounts as you want, with multiple custodians or trustees.
If you want the flexibility of moving your retirement funds between different types of investment products with a single custodian, you first need to make sure that custodian allows those different types of products in your IRA. Not all do. If you open an IRA with a mutual fund company, for example, it might only allow you to hold shares of mutual funds within the company's family of funds. If your custodian is your investments broker, he might allow you to hold stocks in your IRA and to move your assets into a money market mutual fund, but it might not have access to a bank money market account. Your bank might offer an FDIC-insured money market IRA, but not offer stock investments. If your single custodian allows both stocks and bank money market accounts, all you have to do is instruct your custodian to sell your stocks and move the money into your money market account.
If your custodian doesn't offer a bank money market account, you can still move your stock investments, but it will take an additional step. Open a new IRA with a bank that offers the money market account you want to use, then request your new custodian to initiate a trustee-to-trustee transfer. Your old custodian must liquidate your stocks and send the funds directly to your new custodian. You never take possession of the money, so you don't risk having a taxable distribution from your old IRA.
The money in your IRA always belongs to you, and you can pull it out of your account anytime you want, although there are likely be some tax consequences. You can avoid those consequences by doing an IRA rollover. For example, if you own individual stocks and you have a bad feeling about the direction of the stock market, you might tell your custodian to sell and take the money out of your IRA. The IRS gives you 60 days to contribute that money back into another IRA before hitting you with any taxes and early distribution penalties that would otherwise apply. You can take the cash from the distribution and use it to open a new bank money market IRA or contribute it to an existing IRA. Make sure you put the money where you want it to stay for a while; you can only do an IRA rollover with those funds once every 12 months.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.