Ask the Expert: Tax-free IRA transfers

I transferred my 403(b) account into a Rollover IRA at our bank. Turns out, the only investments available are money market funds or CDs. Can I transfer this money from the bank IRA to my existing brokerage IRA? How do we avoid taxes if we do this? I'm younger than 59½, so if it's taxable, we'd also owe an early-withdrawal penalty. 

You don't owe a tax or an IRS penalty when you move an IRA from one custodian to another; but there is a bank fee if the transfer requires breaking a CD before maturity.

Fill out the brokerage paperwork to add the contribution to your existing brokerage IRA or to a new Rollover IRA at the firm. The bank can then transfer the funds electronically into the brokerage IRA, or it can give you a check payable to the brokerage, which you'll deposit there. Either way, no tax is triggered. But if you take a check payable to you, you'll be taxed on it unless you deposit it in a new IRA within 60 days.

It used to be important to transfer money that originated in an employer-sponsored retirement account into a Rollover IRA rather than a regular IRA. This preserved your option to roll it into new employer's retirement plan at a future date. But workplace retirement plans can now accept transfers of regular IRAs.

The only reason for a Rollover IRA today is for extra bankruptcy protection: Federal bankruptcy law gives unlimited protection to Rollover IRAs but protects regular IRAs only up to $1 million. In nonbankruptcy situations, New York law protects 100 percent of all your IRA assets protected from creditors.

The bottom line. A trustee-to-trustee transfer from one IRA provider to another is tax-free, regardless of your age.

Click here to read more  on Rollover IRAs.