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What are the Best Tips for a Roth IRA Rollover?

K. Kinsella
K. Kinsella

A Roth Individual Retirement Account (IRA) is a type of retirement account available to taxpayers in the United States. Roth IRA rollovers involve an investor moving retirement funds between financial institutions that serve as Roth IRA custodians. Investors who plan carefully can avoid paying fees and having taxes withheld when they rollover Roth IRA funds.

The first decision that an investor must make before making plans for a Roth IRA rollover is deciding what kind of investment to make with the account proceeds. Most investors who are close to retirement age are primarily concerned with preservation of funds. Conservative investments, such as bank certificates of deposits (CD), offer principal protection and higher rates of interest than savings accounts. Fixed annuities that are issued by insurance companies are not federally insured, but do offer principal guarantees and a fixed interest rate. Investors should shop around for the best CD and annuity rates at local banks.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Younger investors and people with a more aggressive investment outlook should consider investing in stocks, bonds, or mutual funds. These products have historically enabled investors to enjoy higher returns than conservative products, such as CDs, but there are no principal guarantees because the investments can lose value. Mutual fund companies often charge commissions known as load fees when people buy shares, but these fees can be avoided if you invest in no-load funds. Licensed representatives at banks can provide investors with prospectuses of various mutual funds so that the investors can choose funds that best suit their needs.

Investors can initiate a Roth IRA rollover by either taking possession of the funds and reinvesting the money into a new Roth IRA within 60 days, or by instructing the account custodian to transfer the money directly to a new custodian bank or investment firm. The simplest rollovers involve custodians exchanging funds directly, because no taxes are withheld. When an investor takes possession of the funds, the IRS requires the custodian to withhold 20 percent of the disbursement amount to cover withholding tax. The investor has to replenish the money with separate funds to complete the Roth IRA rollover, and then claim back the taxes at the end of the fiscal year.

IRS rules only allows taxpayers to complete a Roth IRA rollover once a year. Investors should not use a Roth IRA rollover to transfer funds to a bank offering a short-term CD if they intend to transfer the funds elsewhere within a year. People who rollover the same IRA funds twice within a year must pay a tax penalty.

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