Taking RMDs? What You Must Know about Moving Your IRA

Monday, May 16, 2016

By Sarah Brenner, IRA Analyst
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Are you unhappy with how your IRA investment is performing? Are you considering moving your IRA funds to another custodian or advisor? You have this opportunity. Withdrawing your funds from certain investments may result in penalties, but the IRA rules are set up to allow portability. If you are taking required minimum distributions (RMDs) from your IRA, things are a little more complicated but you still have the ability to move your IRA funds.

You will need to decide how you would like to move your IRA funds. You can transfer the funds directly to another IRA or you can take a distribution from your IRA and rollover the money to an IRA within 60 days. If you are required to take RMDs, the rules will be very different depending on how you decide to move your IRA money.

Transfer
A good choice for moving IRA funds is a direct transfer. With a transfer, your IRA funds will not be distributed from your IRA. You will not receive a check payable to you. Instead, the custodian will move the money directly from your existing IRA to the new IRA. The funds will be payable to the new custodian for the benefit of your IRA. Transfers between IRAs are not limited in frequency and are not subject to the 60-day rule. More good news is that you can transfer your required minimum distribution (RMD) and take it later in the year from your new IRA. You are not required to take the RMD prior to the transfer. Do not forget to remove it by the deadline (usually December 31). If you do not take your RMD from the new IRA, you will be hit with a 50% penalty. Your new custodian will not be able to remind you to take the RMD because they will have no way of knowing if you already took it with the previous custodian.

Rolling Over
If you decide to go with a rollover, things will be a little more complicated. You will take a distribution of the funds in your IRA. The way the rules work, the first money distributed from your IRA in a year when you are required to take an RMD will be considered your RMD. There is no choice to take the RMD later. This rule is sometimes called the “first money out rule.” The RMD cannot be rolled over. If you do deposit the RMD into another IRA, it will be considered an excess contribution and need to be corrected following the IRS correction procedures or an excess contribution penalty of 6% will apply each year the funds remain in the IRA. So, take your RMD and then go ahead and move your IRA funds by rolling over the rest of the distribution within 60 days. A final note about rollovers; you can only do one 60-day IRA-to-IRA or Roth IRA-to-Roth IRA rollover in a 12-month period. Though, there are exceptions to every rule.

Making Your Move
Your IRA is always portable. You can change your investment and your IRA custodian. Just remember that if you are taking RMDs, there are some special additional rules you must know. Consider a transfer, rather than rollover, for maximum flexibility when you must take your RMD and always consult with a knowledgeable financial advisor if you have questions about what is the best move for you.

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