If you've ever considered moving your IRA from one location to another, you've probably also been concerned about a penalty. And you should be. The rules about transferring or rolling over IRAs are so confusing that even professionals sometimes lead people astray. These principles can't possibly apply to every unique situation, but if you keep them in mind, you should avoid problems.
Step
Understand the difference between a transfer and a rollover. Confusing the two is the biggest mistake people make when moving IRA accounts. It's very important, because under Internal Revenue Service rules, you can transfer an IRA as often as you want, but you are permitted to roll over an IRA only once every 12 months. Do it more often than that and you are likely to incur a 10 percent penalty.
Step
Arrange a transfer by instructing the custodian of your IRA that you want to move the account without taking a distribution. Request that it be handled as a trustee-to-trustee transfer so that you never actually take possession of the money. This is the key difference between a transfer and a rollover; in the latter, the money passes through your hands on its way from one institution or account to another.
Step
Use an alternate procedure if a trustee-to-trustee transfer isn't possible; if you are not moving the entire IRA account, it may not be. For example, say your IRA is in two different funds from the Nest-Egg mutual fund family. You aren't happy with the way one of them is performing, so you want to move that portion of the account to a new high-yield CD at Rocksolid Bank. In this case, you will probably need to withdraw the money in the form of a check. Be sure to instruct the fund company that the check must be issued to the bank and not to you. Although the check will most likely be sent to you, the payee should look something like this: "Rocksolid Savings and Loan FBO Jane Doe IRA." The "FBO" stands for "for the benefit of," and it means that you will not be able to cash the check yourself. So you still haven't taken possession of the money, and it is still a transfer, not a rollover.
Step
Deposit your FBO check with your new IRA custodian. As long as it has been made out in this format, the IRS will not consider you to have received a distribution from your IRA. This means that if you find a higher-yielding CD at another bank, you can turn around and transfer your IRA again whenever you like. You won't have to report this type of transfer on your tax return, and you will not receive a 1099R form from the custodian for the tax year in which the transfer was made.
Step
Understand one important exception to the transfer procedure. If you are taking money from a 401(k) or other company retirement plan and moving it into a traditional IRA account, the IRS always considers it a distribution. This applies even if you arrange a trustee-to-trustee transfer and never take possession of the money. A transfer from a company retirement plan is treated like a rollover and can be made only once in a 12-month period. When you do this type of transfer, you will receive a Form 1099R from the company, and you will be required to report it as a rollover on your tax return.
Step
To summarize: if you are moving money from one traditional IRA to another, or from one Roth IRA to another, you can do so as often as you like as long as you do not actually receive the money. But if you are moving money into an IRA from another type of retirement plan, or if you need to actually take possession of the money for a short period of time--the limit is 60 days--it's best to work with a qualified tax professional to make sure you understand all the implications and avoid any penalties or other problems.
