Roth IRA owners who want to transfer their account to a new custodian can avoid taxes and penalties if they follow some relatively simple rules. To start with, the owner of the Roth IRA should not close out their old account before they have found and made arrangements with a new custodian.
Receiving a distribution could subject the account owner to taxes and penalties, particularly if they are younger than age 59½ or have not owned a Roth for five years or more. However, hardship withdrawals can be made penalty-free if they are related to the COVID-19 pandemic, per the CARES (Coronavirus Aid, Relief, and Economic Security) Act passed in March 2020.
- A transfer is a tax-free movement of assets between retirement plans.
- Money in a Roth IRA must be transferred into another Roth IRA, not any other type of account.
- Buying or selling securities in the account during the transfer often causes complications and delays.
Roth IRA Transfer Methods
The safest way to accomplish the switch from one Roth account to a new one is by a direct transfer from custodian to custodian. But there is an alternative, which we'll get to later.
In a direct transfer, the current Roth IRA custodian transfers some or all of the money in the account directly to a Roth IRA at another custodian. Direct transfers are not subject to taxes or penalties. Note that it is crucial to transfer the Roth IRA money to another Roth IRA, not to a traditional IRA or some other type of account.
It is usually best to have the receiving custodian initiate the transfer, at the account holder's request. The type of assets held in a Roth will also affect the process. The receiving custodian will typically have the Roth owner indicate whether the assets should be transferred in-kind or, if non-cash assets, liquidated and then transferred.
Most brokerage firms use the Automated Customer Account Transfer Service (ACATS) electronic system to transfer money between accounts. That generally takes about a week. A transfer that cannot be done through ACATS may require up to several weeks.
To keep track of the process, the Financial Industry Regulatory Authority (FINRA) suggests account owners ask the new firm how long the transfer is likely to take, given the type of account and the assets it contains. The account owner can also ask what might cause a delay during the transfer and how the firm will inform them when the transfer is complete. Investors should also note that buying or selling any securities in the account while the transfer is in progress is likely to complicate and delay the process.
Your contributions to a Roth IRA may be withdrawn tax-free at any time, but the account's earnings are subject to different rules.
Distribution to the Account Holder
Another option—albeit a riskier one—is for the account holder to ask for a check from their existing custodian, making it their responsibility to deposit the money into a new Roth account. However, to be considered a tax-free rollover to a new Roth IRA, the money must be deposited in that account within 60 days after receipt of the check.
If the 60-day deadline is missed, the withdrawal will be considered a distribution of the assets, and some of it may be subject to income tax or penalties. Roth contributions can be withdrawn penalty- and tax-free at any time, but their earnings are tax-free only under certain conditions. For example, the withdrawal must be made at least five years after the Roth account was first opened, and the owner must be at least age 59½.
Roth IRA transfers can take anywhere from a week to several weeks, depending on the system used and the kinds of assets in the account.
The Bottom Line
It's possible to move your money from one Roth IRA custodian to another, but it's best to do it through a direct transfer so you won't risk having to pay taxes and penalties if the 60-day deadline is missed.