Rules on IRA Transfer

[Guest star]

I'm very pleased at the wealth of IRA information on this site. Hence the following questions.

At what point is the removal of funds from an IRA account considered a taxable event?

Under what conditions can an individual transfer the IRA funds to another IRA account?

Does the IRA custodian immediately report every such transfer to the IRS?

Many thanks in advance for your answers.

[John G]

If you purpose is to move your assets from one custodian to another, then I highly recommend the "direct transfer". You need no permissions. There are no tax consequences. To effect this transfer, you take a copy of your most recent statement from custodian #1 to the new custodian (#2). You ask custodian #2 for the paperwork for a direct IRA or Roth IRA transfer which is one or two pages including name, address, date of birth, ssn, and beneficiaries. Fill this out and give them the copy of the monthly statement, the new custodian does the work for you. You can specify if everything or nothing is to be liquidated before the move. This event has no tax consequences and you have no reporting requirements or taxes due on your 1040. By far this is the easiest way to change custodians. The process might take about two weeks. There is no 60 day time limit.

You also may elect at any time to close your IRA or Roth and ask for a check. This creates a potential taxable event and a report to the IRS. You then have a 60 day window to roll the funds into another IRA or Roth (like to like). I do not recommend you take this route with a rollover as there are many things that can go wrong.

Additional issues: you may be charged a plan termination fee, but the receiving custodian will often replace this loss if you ask. Note, some mutual funds or other investments may not be able to be moved because of their link to custodian #1.... therefore these would have to be sold before the move. You need to remember to check in the following monthly statements to make sure this was done correctly.

[Guest star]

Great answer, thanks.

What kind of changes to the IRA is the custodian required to regularly report ?

As soon as you close your IRA and ask for the check?

[John G]

Custodians report at the end of the year the annual value of IRAs to the IRS.

Distributions are reported, since they may be a taxable event... this includes anytime a check is delivered to the tax payer, such as when an account is closed. I have always assumed that these are reported annually, but when they are reported makes no difference in what is owed. Perhaps one of our accountants knows.

Buy/sell transactions within an account are not reported.... there is no 1099 for IRAs.... many years ago I asked for a 1099 on an IRA at Bear Stearns (brokerage) and was told their computer system is not set up for such a report. An annual summary of transactions would be helpful.

I do not believe any reporting occurs with custodian to custodian (direct) transfers of an account. This is not a tax event.

Note: what the custodian reports or fails to report does not effect your liability to pay any taxes that are legally owed based upon your transaction. If you close an account and trigger taxes or penalty, you should talk with your accountant to determine if estimated taxes should be paid.

Can you explain why you are so interested in what is reported and when the reports are filed?

[Guest star]

John, thanks for the information. It's general curiosity about how the system works.

[Guest Pensions in Paradise]

After reading all of your posts, I wonder if your latest questions are based on general curiosity. You strike me as someone who wants to push the envelope. Which is perfectly fine. But you really should consult with a tax attorney or accountant.