IRA transfers are now more simplified procedures than they were in the past, but the average person may still find it hard to understand. The process has been simplified because legislative reform to the main types of IRA have cancelled out other types of IRA. The legal changes provide more flexibility for investment, despite not changing regulations relating to direct funding and withdrawal, or taxation applied after retirement.
The IRA transfer that is easiest to understand is the transfer between one IRA account to another. There are many reasons why someone would make this transfer. The account holder may not be happy with the provider’s performance or they might want to just join two separate investment units, which can happen after changing jobs and their previous employer’s contribution to an IRA has stopped. Another reason may be that they want to join funds to make a strong investment, like one in real estate.
An IRA transfer from one account to another is a relatively simple process, and it won’t make a difference to your investment’s tax status if it’s carried out properly. The key thing to note is that you are only given 60 days to invest the transferred money in another security, whether it is an individual bond or stock, or a mutual fund. If you have not made this investment within the given time period, the transfer will be viewed as a taxable withdrawal and the entire investment loses its tax free status. That’s why it’s imperative you undertake the transfer correctly. The investment you make doesn’t have to be a long term one, so even a stop gap investment is fine.
Some other IRA transfer procedures are harder, as they impact on the tax status of the investment. Think about switching money tax free from an IRA that charges tax after the investment to an IRA that charges tax on initial funds. If this scenario was possible, it would mean you would never have to pay tax on your investment. But this is not permitted, which is why strict penalties exist for transferring money into a Roth IRA.
Transferring money out of an IRA to begin a business is slightly controversial. It appears to be for a good purpose – money being transferring into an enterprise that will create tax revenue, and which also increases the income of the IRA account holder to contribute to the investment. But despite the good intention and potential, a lot of businesses are not successful and fail in the first year of running. Many instances have occurred in which IRA holders transfer almost their entire capital and end up losing it all when their business goes downhill.
If you’re interested in a specific type of IRA transfer, whether you might consider it in the near future or you want it as an option just in case, then you need to have the correct type of IRA account to begin with. It will be a lot harder if all of a sudden you realize you need something when you’ve already started. It’s almost always possible to make the IRA transfer you want but it will probably be subject to penalties for it.