Individual retirement accounts, also referred to as IRAs, are a powerful savings platform for adults seeking to gain a stronger financial foothold for their retirement. IRAs exist outside the traditional workplace pension scheme, making them an appealing option for those adults who may not have access to the type of benefits provided by standard pensions. Whether you are interested in opening a traditional IRA or Roth IRA, you can use these accounts to grow your retirement savings over an extended period of time. These accounts can help ensure that you have the funds you need to maintain your standard of living once you leave the workplace.
In certain circumstances, you may need to transfer funds to or from an IRA to another account. Assuming the second account is eligible to receive such transfers, you can enlist the help of an IRA transfer custodian in order to facilitate this process. Generally defined, a transfer custodian is a financial entity that has received the necessary approval from the IRS in order to oversee and manage IRA accounts.
An IRA transfer custodian is the specific bank or financial institution managing your retirement account.
Understanding IRA Transfers
When an individual initiates an IRA transfer, they are moving funds from their own IRA account to another qualified account. The destination account does not have to be an IRA. In fact, individuals can transfer funds from their IRA to a standard bank account, an investment brokerage account or another retirement account if they so choose.
The reasons for initiating such a transfer may vary. That being said, there are few situations where individuals could be prohibited from transferring funds from their IRA to another eligible account. When individuals transfer funds from their IRA account to another IRA account, they will not be forced to pay any fees if the two accounts are of the same format, i.e. a traditional IRA, Roth IRA, etc. However, when individuals begin to transfer funds between two different account formats, specific tax rules and other financial regulations may apply.
Identifying Common Scenarios
Similarly, individuals will be forced to confront various tax issues when transferring funds from a traditional IRA account to a brokerage fund. If an IRA account holder has decided to liquidate their traditional IRA account and place all of the funds in a brokerage account, they must also pay tax on the liquidated sum in order to ensure full compliance with the IRS. An early withdrawal penalty may also apply. Even in situations involving in-kind transfers, specific tax laws may apply. These stipulations are not meant to discourage individuals from undertaking an IRA transfer, but rather to ensure that they successfully avoid violating IRS tax guidelines and incurring an even greater financial penalty during filing season.
Exploring the Role of an IRA Custodian
When you first establish your IRA, you will notice that only specific institutions have the ability to offer these accounts to customers. The IRS maintains strict guidelines regarding which institutions are eligible for hosting IRA accounts, including self-directed IRA providers. The list of qualifying institutions includes banks, credit unions and a variety of "non-bank custodians' that have received specific approval from the IRS in order to host IRA accounts. In the vast majority of situations, the name of the trustee or custodian affiliated with your retirement account will be identical to the institution hosting it.
Whichever organization you choose to host your IRA, they become what is known as your IRA custodian. This organization adheres to various IRS requirements relating to auditing/reporting and regulatory compliance. Simply put, your IRA custodian manages the extensive paperwork involved in ensuring that your account, along with the accounts of countless other individuals, operate efficiently.
In the event that you need to transfer funds from an IRA to another account, you will need to ensure that both of your accounts have a qualified custodian on hand to facilitate the transfer. At the time of the transfer, you will need to inform the custodian of both the original account and the destination account of your request. Each custodian must be given a specific set of information that includes both account numbers involved in the transfer and the specific assets being relocated. Failure to provide this information could result in a voided transaction.
As mentioned previously, specific tax rules may come into play when transferring funds between your eligible accounts. If you are required to pay tax on funds prior to completing the transfer, your account custodian will help inform you of the necessary obligations and ensure that this process is completed correctly.
Evaluating IRA Rollovers
In a scenario where you would prefer not to use transfer custodians to relocate your funds, a rollover may be a viable option. Generally speaking, you have up to 60 days to relocate the funds. If you are planning on using a rollover to transfer funds from an employee pension plan to an IRA, the custodian of the employee plan is required to withhold a portion of your funds as part of an IRS-dictated mandatory 20 percent withholding, unless you make what's known as a direct rollover.
Although you can reclaim this withheld amount at the time of your next tax return, you will be required to contribute these funds from your own means at the time of the rollover in order to avoid a 10 percent early withdrawal penalty imposed on all early distributions from retirement accounts. As can be seen from this particular scenario, the complexity of IRA rollovers and the specific financial requirements involved may make them less appealing for some account holders.
Moving Forward With Your IRA
If you have any questions about the IRA transfer process, it is in your best interest to speak directly with a financial advisor or the custodian of your account in order to ensure that you have the information you need to make an informed decision for your financial future. In some situations, an IRA transfer may not actually be in your best interest given the various penalties or tax duties associated with the process.
Given the looming possibility of penalties and fines the may occur during the transfer process, it is absolutely essential that you fully understand the rules and regulations associated with your specific accounts. This type of knowledge will help you avoid any regulatory infractions and make sure that you are able to take advantage of as much of your retirement savings as possible over the years to come. More information about your IRA accounts and the rules associated with them can also be found through the IRS directly.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.