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After reading Roth IRA: Vanguard vs Free Advisor's Mutual Fund, I'm considering switching my Roth IRA from American Funds to Vanguard.

What should I be aware of when doing so? Would it be better to just open a new account and leave my old one (thus having two accounts), or cash out the old account to switch?

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You can have as many IRA accounts as you want (whether Roth or Traditional), so you can have a Roth IRA with American Funds and another Roth IRA with Vanguard if you like. One disadvantage of having too many IRA accounts with small balances in each is that most custodians (including Vanguard) charge an annual fee for maintaining IRA accounts with small balances but waive the fee if the balance is large. So it is best to keep your Roth IRA in just one or two funds with just one or two custodians until such time as investment returns plus additional contributions made over the years makes the balances large enough to diversify further. Remember also that you cannot contribute the maximum to each IRA; the sum total of all your IRA contributions (doesn't matter whether to Roth or to Traditional IRAs) for any year must satisfy the limit for that year.

You can move money from one IRA of yours to another IRA (of the same type) of yours without any tax issues to worry about. Such movements (called rollovers or transfers) are not contributions and do not count towards the annual contribution limit. The easiest way to do move money from one IRA account to another IRA account is by a trustee-to-trustee transfer where the money goes directly from one custodian (American Funds in this case) to the other custodian (Vanguard in this case). The easiest way of accomplishing this is to call Vanguard or go online on their website, tell them that you are wanting to establish a Roth IRA with them, and that you want to fund it by transferring money held in a Roth IRA with American Funds. Give Vanguard the account number of your existing American Funds IRA, tell them how much you want to transfer over -- $1000 or $20,000 or the entire balance as the case may be -- and tell Vanguard to go get the money. In a few days' time, the money will appear in your new Vanguard Roth IRA and the American Funds Roth IRA will have a smaller balance, possibly a zero balance, or might even be closed if you told Vanguard to collect the entire balance.

DO NOT approach American Funds and tell them that you want to transfer money to a new Roth IRA with Vanguard: they will bitch and moan and drag their heels about doing so because they are unhappy to lose your business, and will probably screw up the transfer. Talk to Vanguard only. They are eager to get their hands on your IRA money and will gladly take care of the whole thing for you at no charge to you.

DO NOT cash in any stock shares, or mutual fund shares, or whatever is in your Roth IRA in preparation for "cashing out of the old account". There is a method where you take a "rollover distribution" from your American Funds Roth IRA and then deposit the money into your new Vanguard Roth IRA within 60 days, but I recommend most strongly against using this because too many people manage to screw it up. It is 60 days, not two months; the clock starts from the day American Funds cuts your check, not when you get the check, and it is stopped when the money gets deposited into your new account, not the day you mailed the check to Vanguard or the day that Vanguard received it, and so on. In short, DO NOT try this at home: stick to a trustee-to-trustee transfer and avoid the hassles.

  • Agreed on just doing the trustee-to-trustee transfer. That was the easiest for me when I did it a couple of years ago. +1 – Peter K. Nov 27 '16 at 21:39
  • Be aware that American funds will most likely charge you a transfer out fee. Scottrade, which is usually low on fees, charged me a large transfer out fee on several IRAs I had when I moved to Vanguard. I may have been able to avoid it by cashing out and handling the IRS paperwork myself. – farnsy Nov 28 '16 at 1:19
  • @farnsy I doubt very much if the fee(s) for a trustee-to-trustee transfer would have been waived for a rollover distribution in which you took the cash and sent it on to your other IRA. – Dilip Sarwate Nov 28 '16 at 3:12
  • @farnsy Do you know how this fee works? Based on your experience, was it some general flat fee (if so about how much) or was it based on your balance/investments (again, if so, do you have a feel for how it was calculated)? Thanks! – theforestecologist Mar 3 '17 at 15:58
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    @theforestecologist It was a flat fee. It was between $75 and $150 if I recall correctly (per IRA...I did my wife's at the same time). Depending on your account size, this could be either large or small, I guess. – farnsy Mar 3 '17 at 16:33

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