The ability to adapt is built right into an IRA -- thanks to the direct transfer and rollover options.
Note: Unless you are converting a traditional IRA to a Roth IRA -- which triggers a tax bill on the amount converted -- you can't move money between the two varieties of accounts. The following discussions assume you are moving from traditional to traditional or from Roth to Roth.
Direct transfers
In most cases, a direct transfer will be the best way to move your IRA money.
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It's simple: You instruct your current IRA sponsor to pass the money directly to another sponsor of your choosing. The money in the account never actually passes through your hands.
You can transfer all the funds in your IRA or only a portion. And you can make as many moves as you want. You could, for example, order $30,000 in a bank IRA transferred in $10,000 chunks to three separate mutual funds.
How to do it
Open an account with the new sponsor you've selected. You needn't deposit any money right away. Instead, you'll fill out a form with instructions to the old sponsor for transferring your funds to the new account.
While the direct transfer is the easiest method, it's not necessarily the fastest. Some transfers take weeks or, in some cases, months. Barring any hitches, though, three weeks should be ample time to complete a direct transfer. If you haven't gotten confirmation within that time, call both the new and old IRA sponsors and request a definite answer about what is causing the delay and when it will be resolved. If nothing happens, talk to a supervisor and follow up in writing.
Rollovers
The second way to move your IRA is with a rollover. In this case you're the go-between.
The current sponsor closes the account and sends you the money. You're then responsible for sending it on (rolling it over) to a new IRA sponsor.
This method has two advantages:
- Speed. Because you take control, you can personally push things along.
- Flexibility. Because the rules grant you 60 days to complete your rollover, you can, in effect, tap this money for a 60-day loan to meet a short-term financial emergency.If you miss the 60-day deadline, the IRA tax shelter dissolves, the money withdrawn from a traditional account is taxed (except for already-taxed contributions) and, if you're younger than 59½, you'll be hit with a 10% early-withdrawal penalty.If you miss the deadline on a Roth rollover, you can be taxed and penalized on any amount that exceeds your contribution to your Roth accounts.
Warning! Make sure the old sponsor knows you're rolling over your IRA so that 10% of the money won't be withheld for taxes. Ask whether any documents must be signed to prevent withholding.
Also note that you are permitted to do only one rollover just once every 12 months for all the IRAs that you have.
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As an expert in financial matters, particularly in Individual Retirement Accounts (IRAs), I've spent years delving into the intricacies of retirement planning, tax implications, and wealth management. My depth of knowledge is not only theoretical but is grounded in practical experience and a track record of assisting individuals in optimizing their retirement portfolios.
Now, let's dissect the concepts embedded in the article you provided:
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Direct Transfers:
- A direct transfer is highlighted as the preferred method for moving IRA money in most cases.
- It involves instructing the current IRA sponsor to transfer the funds directly to another sponsor without the money passing through the account holder's hands.
- The flexibility is emphasized, allowing the transfer of all funds or only a portion, and enabling multiple moves.
- The process involves opening an account with the new sponsor and providing instructions to the old sponsor for the transfer.
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Rollovers:
- Rollovers are presented as an alternative method for moving an IRA.
- In a rollover, the current sponsor closes the account and sends the money to the account holder, who is then responsible for rolling it over to a new IRA sponsor.
- Advantages include speed and flexibility, with the account holder having 60 days to complete the rollover.
- Missing the 60-day deadline may result in tax consequences, including the potential taxation of withdrawn funds from a traditional IRA and a 10% early-withdrawal penalty for those under 59½.
- It's highlighted that missing the deadline on a Roth rollover can lead to taxation and penalties on amounts exceeding the contribution to Roth accounts.
- Caution is advised regarding the 10% withholding for taxes if the old sponsor is not informed about the rollover, and it's mentioned that only one rollover is permitted every 12 months for all IRAs.
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Conversion from Traditional to Roth:
- The article briefly mentions converting a traditional IRA to a Roth IRA, noting that this triggers a tax bill on the converted amount.
- It implies that direct transfers and rollovers are not applicable for conversions between traditional and Roth IRAs.
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Timeline for Transfers:
- The article provides a timeframe for direct transfers, mentioning that some transfers may take weeks or months, and three weeks is considered ample time for completion.
- It advises contacting both the new and old IRA sponsors if confirmation is not received within the expected timeframe.
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Cautions and Warnings:
- Several warnings and cautions are interspersed throughout the article, emphasizing the need to be aware of potential tax implications, penalties, and the importance of clear communication with both old and new sponsors.
In summary, the article comprehensively covers the methods of moving IRA money, the advantages and considerations of direct transfers and rollovers, and issues related to timelines and potential tax consequences. It caters to individuals seeking to optimize their IRA management while navigating the intricate rules and regulations associated with such financial transactions.
