Can I Close an Old IRA and Start a New One?
Original post by Wilhelm Schnotz of Demand Media
Even the best laid retirement plans can hit an unforeseen wrinkle. The money you socked away in an individual retirement account may not be providing the returns you expected, or you found a new job and want to move your retirement from the IRA your former employer provided. Although money invested into an IRA can't be accessed before you turn 59 1/2 without incurring a penalty, the IRS allows you to move funds between IRAs without incurring a penalty if you follow their procedures.
If both financial institutions are willing to accommodate your request, the easiest method to close an IRA and move its funds into another one is through an IRA transfer. In these transactions, you authorize one institution directly transfer funds from one IRA account into an account held by another company. Because the transaction is handled by a pair of trustees who act on your behalf, you never take possession of the funds. The IRS treats the situation as if the funds were continually invested in a single plan, and the transfer doesn't need to be reported to the IRS. The IRS doesn't restrict the number of times or the frequency at which you may make direct IRA transfers between funds.
You may briefly take possession of funds housed in an IRA if you intend to move them into a different account. In this process, known as an IRA rollover, you close the original IRA by receiving a rollover distribution, and the original IRA administrator reports the distribution to the IRS. You have 60 days to return those funds to a qualifying IRA to avoid early withdrawal penalties. When you deposit the funds to a new IRA, that plan's administrator reports the investment to the IRS as well. You must wait a year to perform an IRA rollover with the same funds, although you may make direct transfers as often as you like after performing a rollover.
The IRS treats contributions to traditional IRAs, SEP IRAs, SIMPLE IRAs and Roth IRAs differently, so you may not be able to move funds from one type of IRA to another without incurring a penalty. You may generally move funds between two IRAs of the same type without a penalty. However, funds must remain in an SIMPLE for at least two years before you transfer them in order to avoid a penalty. Funds in Roth IRAs may only be rolled into other Roth IRA, and funds in traditional IRAs may only be moved to traditional and Roth IRAs. Funds in a SEP IRA may be transferred to any other type, as may those in a SIMPLE IRA once you meet the two-year waiting requirement.
Avoiding Taxes and Penalties
When you perform an IRA rollover, make sure to meet the rollover deadline to avoid hefty penalties associated with premature distributions. When you make an early distribution from a traditional IRA, the IRS levies income taxes against the funds. This negates the tax advantage of the plan, as the IRS assesses an additional 10 percent fine for the early disbursement. If you're in the 25 percent tax bracket, mismanagement of a rollover can cost you 35 percent of your retirement savings.
- IRS.gov: Publication 590 - Traditional IRAs
- IRS.gov: Publication 590, Chapter 2 - Roth IRAs
- Kiplinger; Roth IRA Rules; Kim Lankford; January 2010
- Bankrate; IRA Rollover Rules Protect Retirement; Don Taylor; June 2009
- Penn Mutual: Transfers and Rollovers Between IRAs
About the Author
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.