Rolling Over an IRA

The tax advantages you can get with an individual retirement account, or IRA, make it a great tool to save for retirement. But these tax benefits come with strings attached. First, you’ll owe taxes when you withdraw your money (ideally, in retirement). Second, if you take funds out before you reach age 59½, you’ll likely also owe a 10 percent penalty.

But that doesn’t mean that you can’t move funds in an IRA to another similar account. Doing so is typically described as rolling over an IRA or an IRA rollover. Rolling over an IRA allows you to move funds from one account to another and to retain the tax benefits these accounts offer.

Some people use an IRA rollover to combine multiple retirement accounts that they may have accumulated over the years. Others may just want to move money from one firm to another to get better investment options or management. It’s also very common to roll funds from 401(k)s at previous jobs into an IRA.

Below, we explain in more detail what an IRA rollover is and walk through the steps you can follow to roll over your IRA.

What is an IRA rollover?

An IRA rollover is simply the process of moving funds from a retirement account to an IRA. The original account (the one that you are rolling over) can be an IRA, a 401(k) or a similar account, such as a 403(b). The receiving account can be a brand-new IRA, or it can be an existing one that you’ve held for some time.

When you roll over an IRA specifically, you are transferring funds from one IRA into another. It’s also possible to consolidate multiple IRAs by rolling all of them over into a single account.

What is not an IRA rollover?

Not all transfers between retirement accounts will be considered an IRA rollover, including these:

• Roth conversions: A Roth conversion involves converting a traditional IRA into a Roth IRA. A Roth conversion is sometimes called a Roth rollover, but it’s very different from what is typically meant by the term “IRA rollover.” While a Roth conversion may make sense for certain investors, it can also trigger substantial tax liabilities in the year that you convert, so it’s important to understand these liabilities before pursuing a conversion.

• 401(k) rollovers: A 401(k) rollover involves transferring funds or assets from one 401(k) into another 401(k). While the concept is the same, in this case, the destination is a new 401(k). This is typically done after an individual changes employers, though it is often not required.

How to roll over an IRA

Follow the steps below to complete an IRA rollover.

1. Choose a rollover destination.

Before you can roll over an existing IRA, you will need to choose a destination to receive the funds.

If you currently have multiple IRAs, you might decide to keep one of those accounts open while rolling all of the others into it. Alternatively, you might decide that you want to open a brand-new IRA, which will serve as the destination for the funds currently held in your existing account(s).

Whichever route you choose, it’s important that you consider your options carefully. Some factors you should consider when choosing an IRA include:

• Customer service options: If you have questions about your IRA, what customer service options are available to you? Will you have a designated contact person responsible for managing your account? Will you have access to phone assistance, live chat support or other options? Do these options align with your preferences?

• Fees: Different IRA providers may charge different types of fees, including account opening fees, maintenance fees, advisory fees, transaction fees and commissions. Not all fees are bad; sometimes you are paying for service that you won’t get elsewhere. But it’s important to understand the fees and what you get for them, as they can have a considerable impact on your returns over time.

• Investment guidance: Do you want to manage your IRA portfolio on your own, or are you looking for professional investment guidance? Certain IRA providers may be better suited for either option.

Once you have made your selection, open an account with that provider (if necessary). During the account opening process, if you are working with a representative, it can be a good idea to mention that you would like to pursue an IRA rollover, as the company may have resources to help you.

2. Transfer your funds.

When it comes to actually transferring your funds, you have two options: a direct transfer, which is often considered the easier option, or an indirect transfer.

To initiate a direct transfer, also known as a trustee-to-trustee transfer, all you need to do is:

• Determine which account will receive the rollover funds (as noted above).

• Contact the IRA provider that will receive the funds and tell them that you would like to initiate an IRA rollover. In many cases, they will walk you through the process from start to finish.

• Contact your original IRA provider and tell them that you would like to complete a trustee-to-trustee transfer. If you would like to keep all of your investment choices, you should request an in-kind transfer. If you would like to select new investments, you can request to have your assets liquidated.

• The transfer itself will typically be completed within five to 20 business days, though this will largely depend on the two organizations.

For an indirect transfer, also known as a 60-day rollover, you will act as a middleman between the two IRA providers. In this case, your original IRA provider will liquidate your assets and then send you a check with the balance of your account. You will then have 60 days from the day that you receive your distribution to deposit the funds into your new IRA. Failure to meet this deadline may result in taxes and fees.

In most cases, a direct transfer will prove to be the easiest route. That being said, some IRA providers may not be able to complete a direct transfer, making an indirect transfer necessary.

3. Select your investments.

One of the benefits of consolidating multiple IRAs into a single account is that it makes it easier to understand whether or not your asset allocation is appropriate for your financial situation.

Whether you choose an in-kind transfer or you decide to liquidate your assets during the rollover, it's important to ensure that your new portfolio is appropriately diversified according to your risk tolerance, investment timeline and financial goals.

Once you’ve determined how much of your portfolio should be allocated to different asset classes — such as stocks, bonds, real estate, cash, etc. — you can begin selecting investments.

While some investors may decide that they’d like to select individual investments, doing so requires an understanding of the market and a willingness to actively manage your investments. If you prefer to be more hands-off in managing your IRA, funds — such as ETFs, index funds and mutual funds — can be very efficient ways to quickly diversify your portfolio. Additionally, you could also have a financial advisor or firm manage your investments and make decisions on your behalf.

Is rolling over an IRA right for you?

Rolling over an IRA (or multiple IRAs into a single account) can make a lot of sense for many investors. But that doesn’t necessarily mean that it’s the right option for you. If you’re unsure about whether or not to roll over an IRA, a financial advisor can help you see your larger financial picture and show you the impact a rollover could have.

Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.