What are the Roth IRA Transfer Rules?

Roth IRAs can be funded in a number of different ways. In addition to the standard contributions and conversions, rollovers are also possible. Transfers can also fund this retirement plan. If you’re thinking about funding your Roth IRA via a transfer, then there are a few rules that you’re going to need to follow to have a successful experience.

The most common type of transfer is a trustee-to-trustee Roth IRA transfer. This occurs when you select a new financial institution to hold your IRA. It can be a self-directed IRA or you can have someone at the financial institution managing it on your behalf. You will initiate the transfer so that account is sent over in-kind. Non-cash assets in the IRA may need to be liquidated to facilitate the transfer.

The good news is that trustee-to-trustee transfers are not reportable. They do not create any taxes. There is also no limit to the amount of trustee-to-trustee transfers that you initiate during any given tax year.

What If I Want to Move Money Out of a Roth IRA?

Once you open a Roth IRA and make contributions to it, that money cannot be rolled over or transferred into another account. The only method of fund movement that is allowed out of a Roth IRA is called a recharacterization. This means that you will be converting your funds from a Roth IRA contribution to a traditional IRA. You can recharacterize specific contributions you made, rollovers from SEP or SIMPLE IRAs, or conversions that came from a 401k or similar retirement plan.

There are a number of scenarios where recharacterization may happen. The most common reason to perform this type of transfer is that it makes more sense from a financial standpoint to have a traditional IRA instead of a Roth IRA. You can also recharacterize a traditional IRA as a Roth IRA if you meet the income restrictions if you prefer. Conversions may create taxes that need to be paid, so a recharacterization is not always appropriate, especially if there are taxes that would be generated that you cannot afford to pay.

Recharacterizations must happen before the tax filing deadline for each user. If extensions are granted by the IRS, then the deadline for the recharacterization becomes the extension instead of the original April 15 deadline. If there is time between the contribution, there may be a net income or net loss that must also be included in the recharacterization calculation, which may result in a greater or lesser amount that needs to be recharacterized than the initial contribution, transfer, or rollover that occurred.

There may be tax consequences to this type of money movement from a Roth IRA. You may also be subject to early distribution fees in certain circumstances. Characterizing contributions to a traditional IRA may also affect the tax deductions received in the current tax year. You may need to speak with a tax advisor about the consequences of such a decision in your particular circumstances.

Do You Have a Roth Designated Account?

Some folks may have what is called a DRA – a Designated Roth Account. There are Roth 401ks and Roth 403b plans that are offered by some employers. Self-employed individuals may also have their money within this framework. Roth IRA transfers allowed from these DRAs into a Roth IRA whenever you wish to make a transfer. There is no limit to the number of transfers that can be made into the IRA over the course of the year. You cannot, however, transfer money from the Roth IRA to the DRA.

If you have a traditional 401k or similar plan instead of a DRA, then to transfer the funds, you’ll need to perform a direct or indirect rollover. Direct rollovers are the best option as they do not require any withholding to occur. The money is simply transferred from your retirement plan into your designated Roth IRA. You will need to be able to make withdrawals from your 401k or similar plan and the plan must be rollover eligible for the Roth IRA transfer to be considered valid.

If you are using the indirect method of rolling over your 401k or similar retirement plan, then you received a cash distribution from the plan. If you look at the distributed amount, you will see that a percentage of the plan was withheld to pay taxes and penalties. You can recover this withheld amount, but you will need to match that amount, dollar for dollar

There is no limit to the amount of times you can rollover a standard 401k into a Roth IRA retirement plan over the course of a year.

What About Rolling Over One Roth IRA to Another?

You can transfer funds from one Roth IRA to a new Roth IRA if you take a distribution from one and roll it over to another one. This counts as a rollover contribution and the same rollover rules apply. You can only do this once per 12 month period, the rollover must be completed in 60 days, and the same value must be rolled over. In other words, whatever properties were distributed must be rolled over into the new Roth IRA.

It is important to note that this transaction may seem like a transfer, but it is classified for tax purposes as a rollover. A Roth IRA transfer only occurs when you are placing your existing plan with a new financial institution.

Income restrictions always apply when working with a Roth IRA account. You may have a DRA, but if you and your spouse make too much money together to qualify and you file jointly, then you will not be able to transfer your funds into a Roth IRA. In that circumstance, you could rollover your DRA funds into a traditional IRA if you wished, although there may be tax advantages to just keeping your money where it is.

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