Trying to Avoid IRA Transfer Fees Can Be Costly
By Joe Cicchinelli, IRA Technical Expert
Follow Me on Twitter: @JoeCiccEdSlott
If you’re thinking about moving your IRA funds to a different IRA custodian, generally the better way to do it is by transferring the funds directly to another financial institution. IRA-to-IRA transfers are often called direct transfers or trustee-to-trustee transfers. In a direct transfer between IRAs, you don’t have use or control of the IRA money while it’s being moved between two financial institutions. A benefit of using direct transfers between IRAs is that transfers do not have to follow the IRA 60-day rollover rules.
There are generally two ways to do a direct IRA transfer. First, you can have your IRA money wired electronically to your IRA with another IRA custodian. Or, second, you could do a direct transfer by using a check. If a check is used, it must be made payable to the new IRA custodian for the benefit of your IRA. For example, an IRA direct transfer check might be made payable as follows: “ABC Broker FBO John Doe IRA” or something similar that has both the name of the IRA custodian that’s receiving the funds and the name of your IRA on the check.
If a check is used, it’s usually mailed to the receiving IRA custodian. Some financial organizations might allow you to hand-carry the transfer check yourself to the receiving IRA custodian instead of mailing it. Either way is fine.
Some IRA custodians charge a fee for all outgoing IRA-to-IRA transfers while others only charge a fee when the transfer is closing out your entire IRA balance. Let’s assume your custodian charges an IRA transfer fee but does not charge a fee when you take a distribution from your IRA payable to you. So you figure that, to avoid the IRA transfer fee, you’ll simply take a distribution from your IRA and roll over the funds to the receiving IRA custodian. But before you do that, this move could be very costly.
Once you take an IRA distribution, you now have to follow all the IRA-to-IRA rollover rules. One rule is that you must complete a rollover within 60 days after you receive the distribution. Another rule you have to follow is the one-rollover-per year rule. You’re not allowed to roll over more than one distribution from the same IRA within 365 days.
If you violate either of these rollover rules, your IRA distribution is not rollover eligible and thus is taxable to you. So, make sure you don’t violate any rollover rules when you’re trying to avoid an IRA transfer fee. If you’ve already done a rollover from your IRA within the past 365 days, you must move the IRA funds using a direct transfer.
- By Joe Cicchinelli and Jared Trexler
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