IRA Rollovers: A Step-by-Step Guide

Here's what you need to know about IRA rollovers.

Dan Caplinger
Dan Caplinger
Jun 1, 2017 at 11:10AM
Investment Planning

Doing an IRA rollover can be a smart move in order to gain more control over your money and get it to the place where it can work hardest for you. To do an IRA rollover, here are the steps you need to follow:

  • Make sure you're not going to violate IRS restrictions on IRA rollovers.
  • Pick the type of IRA you want.
  • Choose a financial provider.
  • Arrange to have a direct transfer of money from your existing retirement account to the rollover IRA.
  • Set up beneficiaries for your new account.
  • Build an investing strategy that fits with your financial needs.

We'll look at each of these aspects below.

IRA sign.

Image source: Getty Images.

Know the IRS rules on IRA rollovers

The IRS imposes a limit on certain types of IRA rollovers. If you move money from one IRA to another using what's known as an indirect rollover, in which you actually receive the money yourself and then redeposit it into the new IRA, you can't do another such transaction within a 12-month period.

However, there are other ways you can do rollovers. There's no limit on direct rollovers that go straight from the old financial institution to the new one. There's also no limit on rollovers from 401(k) plans to IRAs, or from traditional IRAs to Roth IRAs. Still, it's important to know the rules, because the penalty for violating them will result in including the rollover amount in taxable income. That would mean you'd pay an early withdrawal penalty, if applicable, and it would be treated as an excess contribution if you went through with the rollover into the new IRA.

Picking Roth or traditional

Your choice of destination for your rollover IRA depends on where the money's coming from and what your intentions are. If you have an existing Roth IRA, then you have to roll it over to another Roth IRA. However, if you have a traditional IRA currently, you can roll it over into a Roth IRA, and it will be treated as a Roth conversion. Similar alternatives are available for money coming from qualified retirement plans like 401(k)s.

Choosing a financial provider

You'll need to pick a company to act as custodian for your rollover IRA. Often, retirement savers use brokerage companies, mutual fund providers, or banks to oversee their IRAs. Choose a provider that offers you access to the investments you want at a reasonable price. Fortunately, there are many different financial institutions that fit the bill. That makes it easier to find the one that best fits your specific needs.

Get your money transferred directly

As we mentioned above, the simplest way to handle an IRA rollover is by directly transferring the money from one financial institution to another. That way, there's no danger of a misstep that could create a major tax headache, and there's no temptation for you to do something else with your retirement money for the short period that you have it in your hands. Typically, all it takes is some simple paperwork to do a direct transfer, making it more convenient, as well.

Name a beneficiary

Every IRA should have a named beneficiary who will get your retirement assets after your death. Typically, your will doesn't control IRA assets -- the beneficiary form is the final arbiter of who will later have access to your hard-earned money. That's why it's important not just to make a smart pick early on, but also to keep your beneficiary up to date over time.

Invest smart

Finally, once you've set up your rollover IRA, you'll need to invest it in a manner that's consistent with your needs. IRAs are typically more flexible than 401(k) plans in offering you a wider range of investment choices, so you'll want to take maximum advantage of that flexibility in order to build a portfolio that reflects your investing style and will get you to the goals you've set for yourself.

IRA rollovers aren't difficult to do, and they can be vitally important in making your retirement savings work harder for you. By following these simple steps, you can get yourself established with a rollover IRA that will meet your needs.