It’s occasionally to your advantage to move a tax-free savings account from one bank to another or to another type of financial institution such as a brokerage or mutual fund. The Internal Revenue Service allows such moves, but there are restrictions. As long as you’re mindful of the law, you can move your savings and preserve the tax-free status of your money as well.
In the United States, tax-advantaged savings and investment plans may be either tax-deferred or tax-free. Tax-deferred accounts such as traditional individual retirement accounts offer tax deductions and freedom from taxes for money you deposit in an account, but you have to pay taxes upon withdrawal. A truly tax-free account won’t give you a tax deduction for contributions. However, there are no taxes on interest or other investment earnings while the money stays in the account. Most importantly, as long as you comply with the rules for the type of account you have, withdrawals are tax-free. Roth IRAs, Roth 401(k) plans, 529 plans and Coverdell Educational Savings Accounts are examples of tax-free savings accounts.
One way to transfer a tax-free account from one bank to another is with a rollover. Pick a new bank or another type of financial institution and open an account of the same type. For example, if you have a Roth IRA, open a Roth IRA at the new bank. Next, instruct the trustee of your old account to cut you a check for the amount you want to move. You must deposit the check in your new account within 60 days, or else the IRS will consider the withdrawal a distribution and assess taxes and penalties.
Direct Transfer Method
You may find a direct trustee-to-trustee transfer of tax-free savings account money to be a simpler option than a rollover. As with a rollover, you need to open your new account. Once that’s done, instruct the trustee of the old account to transfer the funds to the trustee of the new account. You don’t have to worry about the 60-day deadline because the money moves directly to the new account. In addition, if the account contains stocks, bonds or other securities, these can be transferred as is. You won’t have to liquidate investments to move the cash as you do with a rollover.
Factors to Consider
The IRS generally allows only one rollover or transfer per year. Also, while you can transfer money between some types of tax-advantaged accounts and others, this is not always allowed. For example, you can move money from a Roth 401(k) to a Roth IRA, but not to an educational savings account. When you move a tax-free savings account, your bank is likely to charge you a fee. According to USA Today, transfer fees can range from $50 to several hundred dollars. However, banks and other financial institutions want people to open tax-advantaged accounts. The new bank may waive some of its fees, offer incentives and even reimburse you for the transfer fee. It pays to find out what a new account provider is willing to offer to get your business.