How do I transfer a mutual fund account to a Roth IRA or Trad IRA and are there penalties?

Dear IRA,

I'm just a little concerned, why would you want to change from a Traditional IRA to a Roth IRA? They are both very different instruments in helping you avoid tax liability for retirement purposes.

In the situation of a Traditional IRA, you're contributing monies that have not been taxed yet (i.e. monies deducted from your paycheck before the IRS has taken their share). In the situation of a Roth IRA, this is where you have contributed "after-tax" dollars. Depending on your job situation and salary, you might want to talk to a CPA or a Financial Consultant before you do this transfer... Especially if you've been maxing out your contributions each year and have established a large retirement account.

I know your question asks "how" but first you have to ask "why." Please keep in mind that switching these IRAs many cause problems later on down the road when you reach the age of retirement and when you're able to draw down on them. Having to prove to the IRS that the monies you contributed to the Traditional IRA wasn't taxed, might be a headache.

In any case, simply go to your bank or financial institution that houses the IRA and ask them to do the transfer. You can do so with a banker or even a teller. Let them know that you want the "transfer" to be "in-kind" and this will ensure that you won't pay any penalties. However, some banks charge you a fee to open the account. To be honest, once you switch to the Roth IRA, I believe you'll have to pay taxes on the funds that you're transferring over at the time of the transfer, or reportedly when you file your tax return for 2007. Some banks will allow you to pay the taxes right there during the transfer.

Things to remember are that the Roth IRA is AFTER-TAX contributions. Depending on which tax-bracket you're in - you might be better off keeping the funds in the Traditional IRA account versus taking the tax-hit when you transfer over to the Roth IRA.

Lastly, it also may be easier to stop contributing to the Traditional IRA altogether and just contribute to a new Roth IRA. In this scenario, after you get your paycheck and the deductions have been made, you would do a transfer into this account (after-tax monies with a check or deposit). At the age of retirement, when you're able to draw down on these funds - you won't pay taxes on the monies that you've contributed, just the interest that has accumulated. However, I don't understand why you wouldn't want to use pre-taxed monies first? Wouldn't you rather keep that money for myself then pay it to the IRS? Did you also know that you could have both a Traditional IRA and a Roth? If you're a high roller, why not have both since they both max out at $4000 in contributions annually... That's $8000 a year that you can put away.

Capuche?

Hope this helps...

~ A.R. Pouretezadi

I'm assuming it's a regular mutual fund. I would talk to a financial consultant to do the paperwork but the easiest way is to do a new application first to open the shell account your ( Roth IRA) this one is the best because the gains are tax free upon withdrawl at 59 1/2. You have to meet the income requirement which is well over 100K and there is a max you can put into the account.

Next step is doing an account transfer or (ACAT) also make sure it's IN KIND (means, it's just a direct transfer of the mutual fund without selling it). No penalties. If you sell the fund to est. this account then you've screwed yourself because you'll be charged full commissions on the sale depending on what type of shares you are selling and also you'll be charged taxes on the gains.

Best advice is to do it with a financial consultant at a bank or brokerage firm that you trust and if they recommend the sale then for no reason whatsoever like, Let's try something new or I can get a far better return in something else then shy away and get a 2nd opinion. It's hard to find a good financial consultant who looks out for the client first.