Recently, I made a decision to merge my multiple Roth IRA accounts with different custodians into a single, cost-effective, and user-friendly Roth IRA. Navigating the process was a bit confusing at first since I wasn’t completely aware of the regulations governing the transfer between custodians.
In this article, I’ll share the steps I followed and provide some insights for anyone looking to make a similar move with their Roth IRA.
Why You Might Consider Switching Your Roth IRA
There can be several motivations to relocate your Roth IRA:
- High fees associated with transactions, account management, or maintenance.
- Limited investment options with your current custodian.
- Transitioning to a financial advisor who collaborates with a different custodian.
- A desire to streamline and simplify your investments.
I previously had Roth IRA accounts with Betterment and Axos Invest. While I appreciate both platforms, Betterment’s policy restricts affiliates, like me, from maintaining accounts. This compelled me to close my account with them.
Methods to Transfer Your Roth IRA
When shifting funds from one Roth IRA to another, there are primarily two approaches:
- Direct Transfer Between Custodians: Here, the funds move directly from one custodian to the next. This is the preferable method since it isn’t taxable and can be done multiple times within a year.
- Rollover Between Roth IRAs: With this method, a check with the funds is issued to the account owner from one Roth IRA, who then has a 60-day window to deposit it into the new Roth IRA. If the deposit isn’t made within this time frame, it becomes taxable. Notably, you’re allowed one tax-free rollover annually, which means subsequent rollovers in the same year could have tax implications.
The IRS has clear guidelines on these transfers:
- From 2015 onwards, only one rollover is allowed from one IRA to another (or the same IRA) within 12 months, irrespective of how many IRAs you possess.
- Transfers directly between IRA custodians are unrestricted.
- Conversions from traditional to Roth IRAs are also unlimited.
In my case, I chose a direct transfer, so I didn’t face any taxation.
My Experience with Roth IRA Relocation
Migrating my Roth IRA was surprisingly straightforward. To eliminate potential tax and paperwork complications, I opted for a direct transfer.
Here’s a snapshot of my transfer process:
- Began the transfer by reaching out to my new Roth IRA provider.
- Completed the necessary documentation and shared required details from the previous provider.
- Coordinated with the former provider to ensure smooth processing and to inquire about any associated costs or fees.
For my specific transfer, I arranged to move funds from Betterment to WiseBanyan. Their instructions were clear: submit a recent statement from the Betterment account, sign a transfer form, and allow approximately 7-10 business days for the process, depending on the initiating firm.
Following WiseBanyan’s guidance and after confirming the necessary steps with Betterment, my funds were transferred smoothly within 17 days, fitting neatly into the 2-3 week estimate provided by Betterment.
Tax Implications of a Roth IRA Transfer
When shifting your Roth IRA, always be conscious of the type of transfer you’re initiating.
For direct transfers, there are typically no tax implications. However, if you choose a rollover and fail to deposit the funds into the new account within 60 days, you could be liable for taxes and a 10% early withdrawal penalty. It’s generally recommended to opt for the direct transfer to sidestep potential tax complications.
Also, it’s wise to check for any closing or transfer fees with your current investment firm. In my situation, Betterment didn’t impose such fees, so there were no additional charges.
If you’ve undertaken a Roth IRA transfer, did you encounter any challenges or have any tips to add?
