Is There a Penalty for Transferring Mutual Fund Accounts?

Your old mutual fund will miss you.

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It’s not unusual to change mutual fund accounts. You might be disenchanted with your current mutual fund or might have found one that seems like a better deal. Whatever your reasons, the transfer might trigger certain redemption charges and capital gains taxes. If you are transferring individual retirement account mutual funds to a new custodian, be aware of penalties if you don’t complete the rollover properly.

Redemption Charges

Mutual funds have a variety of ways to extract fees from customers. Even the best fund companies charge a management fee, which might exceed 1 percent of your investment each year. In addition, a fund might charge a sales fee and/or redemption fee. The U.S. Securities and Exchange Commission imposes a 2 percent limit on redemption fees. If your fund has a redemption fee, you’ll pay it when you sell your shares in preparation for transferring them. Some redemption fees decline over time, so if you hold the mutual fund long enough, you might escape the fee.

Tax Considerations

Selling your mutual fund shares at a profit will create taxable capital gain. If you sell shares that you held for more than a year, you’ll owe long-term capital gains tax on the profit. This tax varies from 20 percent to 0 percent, depending on your gross income. For short-term shares, the tax rate is your marginal rate for ordinary income. If you sell your shares for a loss, you can deduct the loss from your capital gains and from up to $3,000 of ordinary income. You can carry any additional capital losses forward to future tax years.

Sales Loads

Your new fund may have its own up-front sales charge. The Financial Industry Regulatory Authority limits this fee to 8.5 percent, but most funds don’t charge this much. You can avoid the sales load if you transfer the money to a no-load mutual fund. The tax clock on long-term capital gains resets when you transfer money to a new fund. This means you might pay higher taxes on first-year withdrawals from your new fund. Check to see whether your new fund has any redemption fees.

IRA Funds

If you want to move your IRA mutual funds to a new custodian, the simplest way is to request a tax-free trustee-to-trustee transfer. If you instead cash out the old fund, you have 60 days to deposit the money into the new IRA. If you miss the deadline, you must include the money in your ordinary taxable income. If you are younger than 59 1/2, you also might have to pay a 10 percent early withdrawal penalty unless you qualify for an exception. These taxes and penalties are on top of any redemption or sales fees the funds might charge.