Q: I have traditional and Roth IRAs of my own, and I have also inherited some traditional IRAs. I am currently taking annual distributions from the inherited IRAs based upon my own life expectancy. Here are my questions:
When I reach age 59 1/2, I understand that I can "move around" all IRAs (traditional, Roth, and Inherited) without any penalty. Is that correct? Is there any special treatment for moving Inherited IRAs from one bank to another? Now that bank interest rates are slowly creeping up, after I turn 59 and a half I'd like to move some IRAs that are invested in CDs currently earning low interest rates. Are there any tax consequences if I do this? Will I have to file anything with the IRS when I move an IRA from one bank to another?
If I have four IRAs in four different banks, is there any rule against moving all of them in the same year? Is there a limit on the number of times I can move each IRA in one calendar year?
Are there any penalties in "breaking" any of the IRA CDs before their maturity dates?
At what age can I take out some of my own IRA money without penalty? I know that any money I take from the traditional IRAs have to be reported on my tax returns. But am I right that I don't have to report my withdrawals from the Roth IRAs? --DM, via email
A: You don’t have to wait until you’re 59 and a half years old to move the IRAs you own from one provider to another without triggering any taxes or any tax penalty. An IRA owner can do that at any age.
It's not always possible for a beneficiary to move Inherited IRAs, however, as I’ll explain in a moment.
But even though there is no tax penalty, you may trigger a provider's early withdrawal penalty depending on how your IRA is invested. A prime example is moving a CD before its maturity date. The only time banks waive this penalty -- and not all of them do -- is if you must ‘break’ a CD before maturity in order to take a required distribution from an IRA after you turn 70 and a half years old.
You don’t have to file anything with the IRS when you transfer an IRA between providers. And there’s no limit to how many times you can move each IRA in a single calendar year – although moving four IRAs several times a year would require a high tolerance for filling out financial services providers’ paperwork.
The best way to move an IRA from one provider to another is in a trustee-to-trustee transfer: You want to move an IRA from Bank A to Bank B. You open a new IRA at Bank B, and then Bank B asks Bank A to transfer your IRA money into the new account.
Alternatively, you can take a check from Bank A and deposit it in a new IRA in Bank B. But in that case, to avoid taxes you must deposit the entire amount in a new IRA within 60 days. (This is called the 60-day rule.)
You can start withdrawing money from your own traditional IRAs without incurring a 10% early withdrawal tax penalty as soon as you turn 59 and a half. But the amount you withdraw is taxable income. (The IRA custodian reports IRA withdrawals to the IRS – so don’t omit it from your tax return in the hope that you can avoid paying taxes on it.)
Your Roth IRA withdrawals are all tax free after you turn 59 and a half and have owned the account for five years. You don't have to report them to the IRS.
Okay, so what about moving an Inherited IRA from one bank to another?
The IRS has no objection to your doing this, as long as you put the new Inherited IRA account in its original owner's name, listing yourself as the beneficiary. But occasionally, the bank’s rules don’t allow IRA beneficiaries to do a trustee-to-trustee transfer; this doesn't happen often, but it does happen. Unlike an IRA owner, an IRA beneficiary cannot use the 60-day rule to avoid taxes on a transfer. In other words, by refusing to allow trustee-to-trustee transfers, a bank with this rule makes it impossible for a beneficiary to move an Inherited IRA without triggering taxes.
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.