IRA Accounts Can Be Transferred

Dissatisfied with the investment yields or choices on your individual retirement account? Feel like transferring your account to another institution?

You’re not alone. Sales of new IRAs--while greater than expected at some institutions--nonetheless are generally down this year, thanks to their reduced deductibility under tax reform, many IRA marketers report. But transfers between institutions are as active as ever as investors re-evaluate their investment strategies following the October stock crash, IRA marketers say.

“There’s a dramatic shift in what IRA dollars are going into,” says a spokeswoman for Fidelity Investments, a mutual fund company that notes a far more conservative slant among its IRA account holders, with fewer moving into aggressive stock funds and more into less-risky government securities funds.

IRA trustees and custodians are promoting such account jostling in their advertising, trying to steal business from one another as the IRA season enters its final peak stretch before the April 15 deadline for contributions to be eligible for deductions on 1987 returns.

Yet many IRA holders still think that they are stuck with the original bank, savings and loan association, credit union, brokerage, mutual fund firm or insurance company that they placed their IRA in, and that they can’t diversify their accounts among several institutions.

“A lot of people are not even aware they have the ability to move their accounts from one institution to another,” says Erick Kanter, spokesman for the Investment Company Institute, a trade group for the mutual fund industry.

Others misunderstand the rules, thinking that they are entitled to only one transfer per year.

In fact, you can transfer an IRA from institution to institution as often as you wish, provided you don’t take possession of the assets directly. If you do take possession, you can switch once every 12 months per account.

There are many good reasons why you should consider transferring your account. You might want to change your investment mix between stocks, mutual funds, bonds or savings accounts. You might desire an institution offering more investment options. Maybe you want a better broker or improved service. Or you may want to consolidate your accounts under one roof to ease paper work, since tax reform has increased the record-keeping burden for those with non-deductible IRA contributions.

You can handle such transfers in two ways. One is to take physical possession of the assets and take them yourself to your new trustee or custodian. Although you are allowed to do this only once every 12 months per account, this method could allow you to make sure the transfer is completed promptly.

Another advantage of this method is that it allows you use of your IRA money or assets for up to 60 days. So if you have a short-term cash need, transferring your account could also act as an interest-free loan. (But if you put the cash in, say, a money market fund while between trustees, interest or other earnings will be taxable.)

If you have possession for 60 days or longer, bad things will happen. First, your funds will be taxable. Second, if you are under the age of 59 1/2, you will incur a 10% penalty for early withdrawal. Also, you may not be able to get all your funds back into an IRA, since you will be under the $2,000 annual contribution limit per person.

Also, if you handle the transfer yourself, you must make sure that the old trustee or custodian knows it is a switch. Otherwise, the trustee may assume that you are taking permanent possession of the funds and could withhold 10% of your account for taxes.

“So many things can go wrong,” says James L. Dorsey, editor of the IRA Reporter, a Cleveland newsletter. Dorsey says he has heard many horror stories of trustees mistakenly assessing taxes on IRA assets, or consumers not getting their stock certificates.

For these and other reasons, many consumers prefer direct transfers, in which your new trustee or custodian obtains your IRA assets directly from your previous one. You never take physical possession of your assets.

This method, which can be done as often as you wish, subjects you to the least hassle. But you probably will have to sign several forms at both new and old trustee, and you may have to get your signature guaranteed or have documents notarized.

Transfer fees typically are about $10 to $20 but can run as high as $50. And the transfer can take several weeks, particularly at this time of year, when many institutions are inundated with transfer requests. Some banks, for example, require notice for IRA transfers of as long as 30 days.

Delays in transfers have been a significant source of investor complaints to the Securities and Exchange Commission and other agencies, although complaints about foot-dragging have subsided this year as institutions develop more standardized procedures for transfers, IRA industry experts say.

To reduce the chances of delays, read your IRA account documents carefully to see what they say about transfers. Also, ask any potential new trustee or custodian what procedures it has, “to make sure it knows what it’s doing,” Dorsey suggests. If it doesn’t ask for a copy of your latest account statement, to see what types of assets you have, consider finding another trustee, Dorsey suggests.

In some cases you might consider selling certain assets before switching, transferring cash instead, Dorsey suggests. For example, a brokerage house may not be keen on handling the “house brand” mutual funds of a rival brokerage, he says. Also, some trustees and custodians may not take certain assets. Some banks, for example, won’t take limited partnership shares, Dorsey says.