By Sarah Brenner, JD
Are you looking for a better investment for your IRA? Are you thinking about making the move to another IRA custodian or financial advisor? You do have this opportunity. The IRA rules are set up to allow portability. However, if you are taking required minimum distributions (RMDs) from your IRA, you can still move your money, but things are a little more complicated and you will want to be especially cautious.
One way to move your IRA funds is to do a rollover. You will take a distribution of the funds in your IRA. The way the rules work is that the first money distributed from your IRA in a year when you are required to take an RMD will automatically be considered your RMD. With a rollover, there is no ability to take the RMD later. This rule is sometimes called the “first money out rule.” The RMD cannot be rolled over. If you do deposit the RMD to another IRA, it will be considered an excess contribution and need to be corrected following the IRS correction procedures. Otherwise, an excess contribution penalty of 6% will apply each year the funds remain in the IRA. So, take your RMD and then go ahead and move your IRA funds by rolling over the rest of the distribution within 60 days. A final note about rollovers: you can only do one 60-day IRA-to-IRA or Roth IRA-to-Roth IRA rollover in any 12 month period.
Does a rollover sound complicated? It can be and there are lots of possibilities for error. A better choice for moving IRA funds is to do a transfer. With a transfer, your IRA funds will not be distributed from your IRA. You will not receive a check payable to you. Instead, the custodian will move the money directly from your existing IRA to the new IRA. The funds will be payable to the new custodian for the benefit of your IRA. Transfers between IRAs are not limited in frequency and are not subject to the 60-day rule. More good news is that you can transfer your RMD and take it later in the year from your new IRA. You are not required to take the RMD prior to the transfer. Do not forget to remove it by the deadline (usually December 31). If you do not take your RMD from the new IRA, you will be hit with a 50% penalty. Your new custodian will not be able to remind you to take the RMD because it will have no way of knowing if you already took it with the previous custodian.
Your IRA is portable. You can move to a better investment or a different custodian. Just proceed with caution if you are taking RMDs. There are some special additional rules you must know. Consider a transfer, rather than rollover, for maximum flexibility in when you must take your RMD and always consult with a knowledgeable financial advisor if you have questions about what is the best move for you.