The Time Limit to Transfer an IRA

If you have a retirement account from an old job or one that you opened yourself, you might want to move it to a new bank. That's totally legal, but you need to make sure you do it the right way in order to avoid paying unnecessary taxes.

A traditional IRA is a type of account to which you can contribute money while you are working, and you can deduct your contributions from your income tax. You can generally contribute $5,500 a year of earned income to your IRAs or up to $6,500 if you are age 50 or older.

When you reach age 59 ½, you may withdraw money from your IRA without a tax penalty. You must pay tax on the money when you withdraw it, but many retired people pay tax at a lower rate after they no longer have their work earnings, thus boosting their savings. If you withdraw money from an IRA earlier, you must pay a 10 percent penalty on top of the deferred tax unless certain exceptions apply.

You can move money from one IRA to another without paying tax or a penalty. This is known as an IRA rollover. You generally want to work with the financial institutions that hold your old and new accounts to transfer the funds in order to avoid any complications with the IRS. You can, however, also choose to receive the funds from your existing IRA and redeposit them in a new account within 60 days without a penalty. In rare circumstances, you may be able to avoid the penalty if you can prove it's due to a hardship on your part, such as a serious illness or a bank error. You can only make one 60-day rollover per 12-month period, but you can make as many direct institution-to-institution transfers as you wish.

You generally face a 10 percent early withdrawal penalty for taking money out of an IRA before you turn 59 ½, but exceptions can apply. You usually must still pay the deferred tax on the withdrawal amount even if you are exempt from the early withdrawal penalty.

You can withdraw money from an IRA without penalty in some situations if you are called to active duty from the U.S. military reserves or the National Guard. You can also take penalty-free withdrawals to pay for health insurance for yourself and your family if you become unemployed. If you are buying your first home, you can take up to $10,000 out of your IRA for related expenses without a penalty.

Certain medical and higher-education expenses can also be paid for with IRA funds without a penalty. If you become permanently and totally disabled, you can also often take penalty-free withdrawals.

If you leave a job where you have an employer-sponsored retirement account like a 401(k) or a 403(b), you can often roll the funds into a rollover IRA. Similar rules apply, making it generally simpler to have the funds transferred directly to the new account, but you can hold on to the funds for up to 60 days without a tax penalty.

IRAs can offer more flexibility as far as investment opportunities compared to 401(k)s and similar accounts, so it may make sense to search for a rollover IRA when you leave a job with a retirement account. Different brokers will usually offer different combinations of investment opportunities, investment guidance and fees, so shop around for a financial institution that meets your needs. Generally, the institution where you're opening the account can help you transfer the funds in a way that complies with the IRA rollover rules and doesn't incur tax withholding or penalties.

Roth IRAs and Roth 401(k)s work slightly differently from their traditional counterparts. With a Roth account, you deposit money while you are working but still pay tax on the money you put into the account. You don't pay any additional tax when you withdraw from the account at retirement age, meaning that your investments effectively grow tax-free.

Roth IRAs can be valuable if you anticipate being in a high tax bracket when you retire or if you anticipate earning a lot on your investments. You can convert a traditional IRA to a Roth IRA by effectively paying the deferred tax. Talk to your financial institution if you wish to do so. You can take early withdrawals of contributions to a Roth IRA without paying tax or a penalty to the IRS, but if you withdraw earnings, you must pay the usual 10 percent penalty unless an exception applies.

You can sometimes transfer a nonretirement brokerage account from one brokerage to another without having to liquidate your holdings in the original account. This can be advantageous for tax purposes and more efficient if you simply want to move your securities from one broker to another.

Generally, you can work with your new broker to initiate a transfer of assets from the old account to the new without selling them or owing tax. In some cases, if funds or other investments aren't available at your new broker, you may have to sell them before moving the account.

You generally owe capital gains tax at the long-term capital gains rate on investments you've held for at least a year and at the ordinary income rate on investments you've held for less than a year. Most taxpayers pay less on long-term capital gains than on ordinary income.

Once you reach age 70 ½, you must begin to take distributions, or withdrawals, every year from your traditional IRA and 401(k) accounts or face a significant tax penalty. You can use IRS tables or online calculators to calculate your required minimum distribution amounts, which are based on your age and account balances.

If you fail to take the required minimum distribution in a given tax year, you can face a large tax penalty, generally 50 percent of the difference between your actual withdrawal and the required minimum. This is more than you'll pay even in the highest income tax brackets, so it is generally wiser to take the required distributions. Roth IRAs aren't subject to required minimum distributions. Special rules also apply if you inherit an IRA.

The laws around IRAs aren't changing much under the Tax Cuts and Jobs Act, but ordinary income tax rates are generally decreasing starting in 2018. This means that if you do owe tax on an IRA distribution in 2018, it may be less than what you would have paid to withdraw the same amount of money in earlier tax years, and you may save less on your taxes by contributing to an IRA in 2018 than in previous years.