0

Does moving a traditional IRA to a Roth IRA have to be done in the same bank?

I'm asking as I read on https://www.merrilledge.com/retirement/transfer-ira (mirror):

Customer service: You can open an IRA online in minutes—just select the same type of account as the IRA that you're transferring (Traditional or Roth, for example).

I asked the customer service of Merrill Edge, and they reiterated what their website says:

Customer service: In order to transfer and IRA from one firm to Merrill Edge it needs to be "Liked Titled". In an example Traditional to Tradition, Roth to Roth etc.

You: Why?

Fatima C.: In order to transfer assets from one IRA to another IRA at a different brokerage firm, the IRA types must match. Roth and Traditional IRAs are taxed differently. You can transfer your Traditional IRA from Fidelity to a Traditional IRA with Merrill Edge, and then complete a Roth IRA conversion. In order to produce the appropriate tax reporting documents, a conversion is required. This is typically a taxable event and you should also consult with your tax professional.

I wonder if this is some policy specific to Merrill Edge, or some US-wide regulation.

  • 2
    Remember that IRAs don't have to be held at banks. – RonJohn Dec 27 '17 at 3:36
2

'Moving' from traditional to Roth IRA is called a conversion and you have to report the converted amount as ordinary income and pay tax on it now; in exchange you will not pay tax on it in the future when you retire or otherwise take the money out, as you would if you kept it in a traditional IRA, and also for Roth you will not have required distributions (RMD) as you do for traditional. Both accounts can be at the same custodian or different ones -- but if they are at the same custodian the process will probably be a little faster and easier. How the convenience at conversion time compares to other advantages and disadvantages of one custodian versus another in the future is for you to judge.

For some high earners who aren't eligible to contribute to a Roth IRA but want one, contributing to a traditional IRA and then immediately converting to Roth is called a 'backdoor' Roth; there are several existing Qs on this.

You can move one traditional IRA to another, or one Roth IRA to another, with no tax consequence. Generally the "to" institution will encourage you and help you and occasionally offer some kind of reward or bonus -- the MerrillEdge page you link simply offers cash -- while the "from" institution will discourage you, try to convince you not to leave them, and often impose an 'exit' fee. You can similarly move from traditional 401k or other qualified plan to a traditional IRA, or from a Roth plan to a Roth IRA, but if you move from a traditional plan to a Roth IRA that also is a conversion and taxable.


Added: the particular trustee may restrict this but it's not an IRS requirement. Found in pub 590A chapter 2 at Conversions 2016 still on the website but I expect that will change soon and all years available in PDF nearby:

Conversion methods. You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways.

  • Rollover. You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution.

  • Trustee-to-trustee transfer. You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA.

  • Same trustee transfer. If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA.

  • Thank you. I understand the tax implications. But why would Merrill Edge say "select the same type of account as the IRA that you're transferring (Traditional or Roth, for example)."? – Franck Dernoncourt Dec 27 '17 at 18:48
  • @FranckDernoncourt: they expect most people don't want a huge tax bill. 'Switch your account to us and it's tastier and more fun' is attractive to many people -- but they don't know what type you have now so you need to tell them. 'Switch your account to us and pay hundreds of thousands of dollars tax' is less attractive -- they figure if you want to convert you can take the initiative. – dave_thompson_085 Dec 28 '17 at 0:57
2

While it appears that you can go from a IRA at institution X to a Roth IRA at institution Y, this isn't always the best option.

A little over a year ago my son had to close out his 401K because the amount in the account was under 1K. The options were limited because it was under the minimums for IRA funds, except at his bank which paid essentially 0% interest.. The company where he had a Roth IRA suggested a mid-air conversion. they said they did these all the time. They told him how to fill out the forms, and everything seemed OK.

Then he didn't get a 1099 by the end of February. It was a mess. They had it in the account but they forgot about the mid-air conversion. They refused to address it. The 401K said it left as non-Roth, the IRA custodian said it arrived as Roth. In the end which took until the April 15th to get it straitened out. The delays were that the people on the phone would understand the problem and resolve the issue, only to have the people who had to implement the solution wouldn't agree. And then the cycle would start again.

My suggestion would be to make the conversion within the same institution. That minimizes the number of inquisitions you have to deal with if there is an issue.

  • Thank you, that's an interesting experience. "My suggestion would be to make the conversion within the same institution." -> one downside is that one would have to create one more account, which may have its own fees (closing fees , low balance fee, etc.). But maybe worth avoiding the headache you mention. – Franck Dernoncourt Dec 30 '17 at 20:38
1

The direct transfer of assets from the custodian of the Traditional IRA to the different custodian of the Roth IRA is not discussed at all in the Traditional IRA chapter of Publication 590a but the chapter does say that the IRA owner can take a distribution from a Traditional IRA and within 60 days, roll it over into a Roth IRA, and not have to pay the 10% penalty for taking an early distribution from the Traditional IRA (assuming, of course, that the IRA owner is young enough that the early withdrawal penalty is applicable). Whatever amount came out of the IRA but didn't get rolled over properly in timely fashion (e.g. because taxes were withheld from the distribution and the IRA owner simply sent the amount of the distribution check to the Roth IRA custodian) is subject to the 10% penalty for early distributions. Income tax is certainly due on the total amount of the distribution, less that part of the distribution that is a return of nondeductible post-tax contributions, if any, to the Traditional IRA. It is also worth pointing out that 60 days is meant literally -- it is not the same as two months as so many people think -- and that the 60 day clock starts from the date that the transmitting custodian records the withdrawal on its books. The deposit into the Roth IRA must occur within 60 days from this date, and the postmark on the envelope in which the check was sent or the date that it was received by the Roth IRA custodian are irrelevant; what matters is the date that the Roth IRA custodian records the money as having been deposited into the Roth IRA.

As @dave-thompson_085 points out, if the question that the OP asked is rephrased as

Is a direct transfer from a Traditional IRA held by one custodian to a Roth IRA with a different custodian prohibited by law? or is it just a rule that is almost universally followed by IRA custodians?

the answer is "Yes, they are permitted" as stated explicitly on page 45 of the Roth IRA chapter of Pub590a (2016 edition; the 2017 tax year edition has not been released as yet) that deals with converting to a Roth IRA. But, there can be good reasons why Traditional IRA Agreements (they do differ somewhat from custodian to custodian) might well not allow requests from the Traditional IRA owner to transfer assets to a Roth IRA with a different custodian. Pub590a says

You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA.

which is different from the way that most such transfers might work in practice, where it is the recipient custodian who contacts the Traditional IRA custodian saying something to the effect that ""Our client has a Roth IRA with us/is establishing a Roth IRA with us, and has authorized us to collect the IRA money that you are holding and put it in the Roth IRA". Does this request from the Roth IRA custodian count as a direct instruction from the IRA owner to the Traditional IRA custodian to do a trustee-to-trustee transfer of funds? I don't know. A literal reading of Pub590a suggests that it might not count as a direct instruction. With a direct instruction as envisioned in the highlighted quote above, the Traditional IRA custodian has no assurances that the recipient Roth IRA exists, or that the recipient custodian even knows about the matter or is expecting the funds. Overall, a can of worms that is best left unopened by prohibiting Traditional to Roth conversions via direct transfer in the Traditional IRA Agreement; let the owner request a distribution and put the onus on the owner to get the entire distribution to the Roth IRA custodian in timely fashion, and be responsible for taxes on what didn't get converted, whether inadvertently or advertently. I note, for example, that Vanguard's website has no forms for requesting a transfer of Vanguard IRA assets to a different custodian (not even for a Traditional to Traditional or Roth to Roth transfer where tax is not an issue) whereas forms for transferring IRA assets to Vanguard can even be completed online. So, either Vanguard's Traditional IRA Agreement (ditto Roth IRA Agreement) doesn't allow direct Vanguard-initiated transfers of IRA assets to another custodian (but will accept requests initiated by the recipient custodian), or the IRA owner has to hassle with Vanguard's Customer Service to demand that such a transfer be done because it is legal and not explicitly forbidden in the IRA agreement.

If the money is staying in house, being transferred from Traditional to Roth, it is guaranteed that the conversion will meet the 60-day rule. Similarly, Traditional to Traditional or Roth to Roth transfers of IRA money from one custodian to another are easy to handle via direct transfer from one custodian to another, but once again, these might need to be initiated by the recipient custodian. Thus, it seems to me that the OP most likely has two options: (i) do an in-house Traditional to Roth conversion at Fidelity and then transfer the Roth IRA to Merrill Edge (can be done as a direct transfer initiated by Merrill Edge, not Fidelity) or (ii) do a Traditional to Traditional transfer from Fidelity to Merrill Edge as a direct transfer (also initiated by Merrill Edge), and then do a Traditional to Roth conversion at Merrill Edge. (ii) is the option that the Merrill Edge customer service is recommending (because it gets the money into Merrill Edge's hands earlier without any hassles of conversions). In either case (ii) or (i), the transfer to Merrill Edge is best initiated by Merrill Edge rather than hassling with Fidelity.

  • The 590A I currently see online (for 2016) and the PDF do cover this on p45 under "Can You Move Amounts Into a Roth IRA" then "Conversions". – dave_thompson_085 Dec 29 '17 at 8:01

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .