What Is the Transfer of a Roth IRA?

Roth IRA owners may want to transfer their Roth account to a new custodian without incurring taxes. This is possible if the Roth IRA owner is aware of the rules governing Roth IRAs and avoids choices that could put them at risk of taxes and penalties.

To start with, the owner of the Roth IRA account should not close out their old account before they have found 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. Here is the safest way to transfer a Roth IRA from one custodian to another.

Key Takeaways

  • A transfer is a tax-free movement of assets between retirement plans.
  • Direct transfers cannot be done between different types of IRA accounts.
  • Buying and selling securities during the transfer often causes complications and delays.

Transfer Methods

The best way to accomplish the switch from one Roth account to a new one is by direct transfer from custodian to custodian. But there is an alternative.

Direct transfer

With the direct-transfer option, a current Roth IRA custodian transfers some or all of the funds directly to the Roth IRA account at another custodian. Direct transfers are not counted as distributions or taxable income and are not subject to any taxes or penalties.

It is crucial to transfer the Roth IRA money to another Roth IRA, not to a traditional IRA or some other type of account. Read the agreement carefully and make sure that this stipulation is followed.

It is desirable to have the receiving custodian initiate the transfer. The type of assets held in a Roth will also affect the process. The receiving custodian will typically have the Roth owner dictate whether the assets must be transferred in-kind, or if non-cash assets must be liquidated and then transferred.

Most brokerage firms use the Automated Customer Account Transfer Service (ACATS) electronic system to transfer between accounts, which usually takes approximately one week. A transfer that cannot be done by ACATS may take up to several weeks.

According to the Financial Industry Regulatory Authority, investors can become familiar with the account transfer process by asking the new firm the anticipated length of the transfer given the type of account and the assets held. The account owner can ask what might cause a delay during the transfer and how the firm will inform the account holder when the transfer is complete.

Investors should also note that buying and selling securities during the transfer is likely to complicate and delay the process. One possible move when switching custodians might be to withdraw the entire amount in the Roth and deposit it with the new custodian.

Direct transfers are not counted as distributions or taxable income, and are not subject to taxes or penalties.

Distribution to the account holder

Another option is for the account holder to receive a check from their existing custodian, making it their responsibility to deposit the money into a new Roth account. However, to be considered a rollover contribution 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 the earnings are subject to rules. These include that the withdrawal must be made at least five years after the Roth account was first opened, and the the owner withdrawing is at least age 59½.

Fast Fact

If a Roth IRA account holder receives a distribution when they are younger than age 59½ or have not owned a Roth for five years or more, they could be subject to taxes and penalties.

The Bottom Line

A Roth IRA is a retirement savings account that allows funds to grow and accumulate. After-tax dollars fund a Roth, which means that the growth is tax-free and so are withdrawals in retirement in return for no up-front tax break. Funds can be transferred from one Roth IRA to another Roth IRA, but the account holder must follow the rules associated with Roth IRAs.