Up until recently I had Roth IRA accounts with two account custodians.
Last month I decided to close all but one of my Roth IRA accounts in order to consolidate into one low cost, easy to access and manage Roth IRA.
While I didn't anticipate that the process would be too hard, I wasn't sure what the rules were surrounding doing a transfer of Roth IRA funds from one account custodian to another.
Today I'll take a look at the process I went through, and some considerations you might want to keep in mind when doing your own Roth IRA transfer.
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Reasons You Might Want To Move Your Roth IRA
There are a variety of reasons why you might want to consider moving your Roth IRA from one custodian to another.
- High account fees, transaction costs or management costs.
- Your custodian has a limited number of available investments.
- You have a new financial advisor that works with a specific account custodian.
- You might want to simplify your holdings.
While I love both services, I have an affiliate relationship with Betterment where when someone opens an account with their service, I may receive an affiliate commission. Betterment has recently made it clear that if you are an affiliate, you can no longer have an account with their service. As such I needed to close my Betterment account.
Types Of Roth IRA Transfer
There are a couple of different kinds of Roth IRA account transfers you can do when moving funds from one Roth IRA account to another.
- Direct trustee-to-trustee-transfer: In this type of transfer you can do a direct transfer of funds from one account custodian to another. This transfer is done by the trustees themselves and the money is directly transferred between the accounts. This type of transfer is ideal as it isn't a taxable event, and you can do as many of these as you want in a tax year.
- A rollover between two Roth IRAs: In this type of transfer a distribution of funds from one Roth IRA is sent via check to the account owner, who then has 60 days to transfer the funds to the new IRA account. If the funds are not transferred to a new custodian within 60 days, the distribution becomes taxable. Each individual can do one tax free rollover of funds per year, which means you wouldn't be able to do another one for a separate IRA or Roth IRA account within the same tax year.
If you're doing a rollover between two Roth IRAs, there is an IRS rule that says you can only do one of these per year. From the IRS:
Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own. The limit will apply by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit.
-Trustee-to-trustee transfers between IRAs are not limited
-Rollovers from traditional to Roth IRAs (“conversions”) are not limited
So essentially since I did a direct trustee-to-trustee transfer, my transfer was not a taxable event.
If I had done a regular rollover and it was either my second of the year, or I didn't do the rollover within the 60 day window, any previously untaxed amounts distributed from the IRA would need to be added to my gross income, and I may be subject to the 10% early withdrawal tax on the amounts included in gross income as well. Here are further details from the IRS on their one per year rule on IRA rollovers.
My Roth IRA Transfer Experience
My Roth IRA transfer experience was an extremely simple process.
I decided to do a direct trustee-to-trustee-transfer from one account custodian to another in order to avoid any potential tax and reporting issues that can happen when you do an account rollover (where you receive a check for the proceeds from your old account custodian). While I would have a 60 day window to transfer the funds to the new account custodian, I didn't want to have to deal with the potential issues involved with that.
The steps involved in the direct trustee-to-trustee-transfer:
- Initiate the transfer request with your new Roth IRA account provider.
- Fill out any requested paperwork and provide requested documents from your old provider.
- Confirm the transfer with your old provider and make sure there isn't anything else you need to do on their end. Also verify if there are account closure or transfer fees.
In my situation I initiated a direct funds transfer with WiseBanyan to have the proceeds from my Betterment account transferred directly to my WiseBanyan account.
Here were their instructions to me:
The first step to transferring your Roth IRA is to email me a recent statement from your Betterment account. We will then send you a transfer form to sign. This will allow Betterment to send us the funds directly, so you would not have to deposit yourself.
Please note we cannot accept any transfers in-kind, which means that your funds at Betterment will have to be liquidated to cash before we can accept it. You can give the liquidation instruction on the transfer form. Once the transfer is initiated the process can take about 7-10 business days, depending on the delivering firm.
So based on these instructions I sent a statement from my old Roth IRA account to WiseBanyan, and using the information on the statement, including the account number from my old Roth IRA, they pre-filled a transfer request that I then had to complete and sign. Once that was completed it was just a matter of waiting for the transfer to happen.
To be sure I also confirmed with Betterment what I needed to do to transfer my funds out from their end.
To transfer your IRA out of Betterment, your new provider will need to send us direct transfer paperwork, so we can send them a check of the funds directly. Please contact your new provider for details. The transfer paperwork should include a copy of the first page of your most recent Betterment statement, which you can find on your Activity page. In addition, if you are transferring out more than $250,000, the transfer paperwork will need to be medallion signature guaranteed. Generally transfers are completed within 2-3 weeks of receiving the paperwork.
Since the amount was less than $250,000, and I had already initiated the direct transfer paperwork including the first page of my most recent statement, it was all set to go. It was just a matter of waiting for the transfer to take place.
In the end the full direct funds transfer from one account to another took about 17 days in my case, from start to finish. That was well within the 2-3 weeks quoted by Betterment.
Tax Considerations Of Doing A Roth IRA Rollover
When doing your Roth IRA transfer from one account provider to another, it's important to keep in mind what type of transfer you're doing.
If you do a direct trustee-to-trustee-transfer the process should be extremely easy and there really shouldn't be any tax consequences for doing the transfer.
If you do a rollover between two Roth IRAs where you receive a check for the proceeds of your old account, you'll need to make sure that you transfer the funds to the new account custodian within 60 days. If you don't you'll likely be subject to taxes and 10% early withdrawal penalties.
In most cases, you're better off just doing a direct trustee-to-trustee transfer, and avoiding any of the tax issues.
Also, keep in mind that with some investment companies if you're closing an account or transferring an account to a new provider, you may be subject to account closure or transfer fees. Check with your provider to find out. Thankfully Betterment does not charge any of those fees, so I was off the hook for that.
Have you done a transfer of Roth IRA funds to a new provider? Did you run into any snags in the process?