An IRA transfer is the transfer of funds from an individual retirement account (IRA) to another type of retirement account, brokerage account or bank account.
An IRA transfer can be made directly to another account. IRA transfers can also involve the liquidation of funds for depositing capital in a new account.
Investors establish IRA accounts for the purpose of saving for retirement. There are two basic types of IRA accounts that facilitate IRA investing. Investors can choose from a Traditional IRA or a Roth IRA. Investing in these IRAs has differing tax implications that can be important considerations if an investor chooses to make an IRA transfer. All IRAs are designed to begin payouts at the age of 59½. Prior to that investors may incur early withdrawal penalties.
Traditional IRA: In a Traditional IRA investments are made from pre-tax income. Contributions to a Traditional IRA are usually tax deductible in the year of the contribution up to a certain limit. In 2018, investors under 50 can deduct up to $5,500 and investors age 50 and over can deduct up to $6,500.
Withdrawals are taxed at an investor’s income tax rate in retirement. Any early withdrawals or liquidations of a Traditional IRA will have penalties and be taxed at the ordinary income rate.
Roth IRA: Roth IRAs offer after-tax investments. Since investments are made post tax, withdrawals are tax free in retirement. If an investor chooses to liquidate prior to the age of 59½, the investor will not have to pay taxes and in many cases will not incur any early withdrawal penalties.
IRA transfers can be simple when they are made between common types of accounts. An investor can transfer a Traditional IRA from one service provider to another without any costs. The same is true with a Roth IRA, which also can be transferred easily from one service provider to another as long as the type of account is the same. IRA transfers can become complex when they involve liquidations or conversions. Traditional IRAs will involve the greatest tax implications if converted to a Roth or liquidated. Investors converting a Traditional IRA to a Roth IRA will have to pay the income taxes associated with the Traditional IRA before depositing funds in a Roth IRA. Investors making a liquidation from a Traditional IRA to fund a brokerage account would also have to pay the taxes. In-kind transfers may be accepted from one account to another however tax implications would still apply.