Like a manager changing pitchers in a baseball game, sometimes it makes sense to find a new investment for your IRA. Whether you’re moving funds because of poor performance, a change of goals or better diversification, there are a few rules to follow when rolling over your IRA to a new trustee. Be careful when making a switch; if you don’t complete your rollover correctly, you may end up paying income taxes and penalties for breaking some fairly straightforward rollover rules.
Find a new IRA. IRAs are offered through nearly every large bank, brokerage house or mutual fund provider. Mutual funds are a popular choice for IRA plans and many fund families offer IRAs. Some investors prefer a bank that may also offer lower-risk IRA investments or brokerage houses that allow them to easily trade between families of mutual funds and other investments such as stocks or exchange-traded funds.
Ask about fees to roll over your IRA. There are two fees investors frequently find when rolling over an IRA. The first is a fee to sell the investment. Mutual funds may charge a contingent-deferred sales charge; annuities charge surrender fees and contract charges; and stocks and bonds may charge commissions to sell the investment. The second type of fee is to transfer the funds to the new account, which, according to USA Today, may stretch into the hundreds-of-dollars range. Understand these fees fully before selling your investment and rolling over your IRA.
Ask your new IRA provider for the correct forms. If you like your IRA investment choices but wish to move the entire account to another firm, ask for an account transfer form to transfer assets in-kind. Specify a transfer form rather than rollover form for IRA-to-IRA switches. The IRS will not withhold money from transfers but will from rollovers.
Track your IRA rollover. If you chose to directly transfer funds and avoid tax withholding and possible taxes and penalties, you should follow up if funds haven't switched in two weeks. If you instead decide to roll over the IRA, funds will come to you minus a mandatory 20 percent withholding. You’ll need to replace this amount from dollars outside the IRA to avoid paying taxes on the money. Those over 59½, would also have to pay a 10 percent penalty if they didn’t replace the IRA withholding dollars.
File your tax forms to legally complete the process. When you take possession of the funds before rolling over your assets rather than use a direct trustee-to-trustee transfer, you’ll need to report the rollover on your 1040 at tax time. Your old IRA company will send a 1099-R form. The amount distributed goes on line 11a if you use Form 1040A or on line 15a for Form 1040. The amount taxable, which will be zero because you aren’t touching the money, goes on line 11b for 1040A and 15b for straight 1040 filers. Write the word “rollover” next to the amount.
As a former financial advisor to companies and individuals for 16 years, Joe Andrews knows financial planning and marketing from start-ups to personal budgets. He also writes on motor racing, board games and travel. Andrews received his B.A. from Michigan State University in English. He is currently working on a young adult novel.