Can I Change Funds in a Roth IRA?
Original post by Leslie McClintock of Demand Media
You can, indeed, change funds in a Roth IRA, free from any federal tax consequence whatsoever, as long as that money remains within the Roth IRA. However, before you make a lot of trades, there are certain restrictions and other considerations that may apply.
Since you have already paid income tax on contributions to a Roth IRA, you generally have no further federal tax obligation during your lifetime on the Roth IRA assets, provided they remain in the Roth IRA at least five years after your contribution. The income tax has already been paid and assets in Roth IRAs are not subject to capital gains tax. They also cannot be claimed as capital losses, unless you liquidate the IRA.
Just because you have no federal tax consequence on trades within a Roth IRA doesn't mean that your trades have no cost. If your fund company or broker charges commissions, or sales charges, you may still pay these even within Roth IRAs. Many fund companies waive sales charges on funds within the Roth IRA and other retirement accounts. Check with your fund companies -- both ones you plan to sell and ones you plan to buy -- for details concerning your plan.
Most mutual funds are not designed for frequent traders -- especially in retirement accounts -- because they hurt present shareholders by increasing trading costs and expense ratios for other investors in the fund. Some companies will charge a fee of up to 2 percent for any withdrawals made within a short time of investing in the fund. Some funds also restrict your ability to purchase more shares in the fund within a certain amount of time of redeeming shares. This policy helps deter market-timers, who can be disruptive to fund operations and increase a fund's costs.
Some funds, and some share classes within funds, impose minimum allowable contributions. Often these minimums are substantially lowered for IRA contributions and rollovers. Be sure you check the new fund's prospectus to determine the fund minimums prior to moving money around.
- Securities and Exchange Commission: Mutual Fund Fees and Expenses; Redemption
- DinkerBiddle.com: Officials Probe Mutual Fund Market Timing, Late Trading and Valuation Issues
- Securities and Exchange Commission: Final Rule - Redemption Fees
About the Author
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.