Disclaimer: We’re not tax professionals, this does not constitute tax advice. Please consult a tax professional.
As I start to reconsider whether completing brokerage sign up bonuses are worth doing or not, one of the questions asked by a reader was does moving from one brokerage to another cause a taxable event? The short answer is that as long as you’re transferring your investments and not selling them it’s not considered a taxable event. The long answer is that as always you should consult a tax professional to understand your unique circumstances.
When you transfer between brokerages this is handled by an automated process called Automated Customer Account Transfer Service (ACATS) and this is managed by National Securities Clearing Corporation (NSCC). To transfer between brokerages you need to complete something called a Transfer Initiation Form, this process is usually clearly outlined by the new brokerage you’re transferring your investments to.
The only time you’d need to sell your investments when transferring between brokerages is if the new brokerage doesn’t handle the investments you currently hold (e.g some brokerages will offer proprietary investment vehicles that others don’t support. Some will argue this is done in large part to prevent you switching brokerages). If this is the case I don’t think it’s worth considering a new brokerage with a sign up bonus as the tax implication and headache involved simply won’t be worth the effort.
Another consideration would be as it relates to cost basis of the investments. If they were acquired after 2010 you should not have a problem and brokerages are supposed to be calculating it for you, but i have had 2 instances that shares acquired after 2010 used an exception for not keeping track because the transfer agent holding the shares changed (It was two different transfer agents too). I keep track of my own cost basis just because i’m a little anal, but just another consideration. If the shares you are transferring were purchased before 2010 then you are on your own anyways so change all you want.
Hey Guys. I’ve been a broker for 15 years and here are some things to consider with brokerage accounts.
1. Make sure you are not paying any commissions as part of the transfer/rebalance at new firm.
2. Make sure you are not paying any outgoing transfer fees (these can often be over $100 regardless of when you move the assets).
3. Moving assets from one firm to another may take you out of the market for up to two weeks. If the market were to have a significant increase (say 2%) then you may miss out on thousands of dollars of gain you would have otherwise made if you didn’t liquidated to cash. i.e. $100,000 invested would have increased by $2000 but since you were in cash you missed those gains. Of course the market could go DOWN in that two weeks but historically the number of up weeks in the market opposed to the number of down weeks is almost 5 to 1 so the odds are not worth playing.
Hope this helps.
“Moving assets from one firm to another may take you out of the market for up to two weeks.”
Eh? When you move **assets**, transferring 100 shares of VTI out, will get 100 shares of VTI transferred in. You will not be out of the market at any time. You’ll be out of the market only if you don’t transfer assets but liquidate and transfer cash.
I think what he means is that you lose the ability to trade. So if you had cash being moved, you could not buy if there was a sale on stocks one day. Or vice versa, if some bad news was happening, and you wanted to sell, you would have to wait til the account was fully set up.
For most passive , buy & hold types this might not matter. But for an active trader, this could be an issue, and its a good pointer from curtis leasure.
=====
In general these brokerage bonuses are easy and worth doing, but the heyday is gone. Once upon a time Fido would let you keep on getting AA, United, Delta miles and it was a good deal. They finally realized that they were not getting good customers from this, AND these types of customers were not buying high expense ratio / management fee Fidelity products.
.
I moved money from TIAA to Fidelity in January of 2016. Because the funds I was in at TIAA were institutional and similar, they could not be held at Fidelity. As a result, I liquidated my entire TIAA account when I made the decision to move the last week of December 2015 (I had some losses that I was able to take, another benefit). You may recall that January 2016 was a terrible month for the market. I was on vacation for 12 days at the start of January and it took at least a week to get the money transferred over in full. As a result of all of this, I was out of the market (with that money) during the worst of it. It worked out pretty well for me! Plus I got a bunch of money from Fidelity for doing the transfer!
You’re going to have to pay tax on the money at some point regardless. It’s just one more consideration as to whether the bonus is worth it.
If you’re in a year that your income is low. then liquidating your funds to change to a different security would be no big deal, as paying taxes on some gains is to your benefit. – The bonus is just an additional perk.
– Definitely a lot of considerations here. Agree with Will. Not worth moving securities that have to be liquidated unless it is something you want/need to do already.
I’ve done this a bunch. It’s pretty normal to ask the new broker to verify that all the assets in the prior brokerage account can be custodied at your new platform. The ones that can’t (and might need to be sold) can stay in the old one, or if they are underwater from a tax stance, sell them and take the loss.
Moving securities from an account owned by the same beneficial owner to another also owned by the same beneficial owner isn’t a taxable event, as long as you don’t sell them. But if you are moving a holding from (hypothetically) a parental a/c to a childs one, you could trigger a gift tax if it was too large of a move, even if a sale didn’t happen. People who are doing something like that normally though are pretty aware of all the rules.
If you stick with big broadmarket normal types of ETFs (VT, IVV, etc.) everyone should be able to handle them.
TL;DR: check with new prospective broker first that they can custody your holdings, thus not requiring the sale. Most of the time everything will be fine.
+1
It’s my understanding there could be a penalty tax event if the ira you’re transferring is engaged in a 72t.
If all the funds transfer I believe it is ok if they keep the current payment method.
The problem is some of the investments may not transfer and are left at the old brokerage. This will likely trigger a penalty tax event.
And always remember to ask the new brokerage to reimburse any fees charged due to the transfer/closing account by the old brokerage.
Couple of years back, I moved my Vanguard IRA to Chase to become private client. When private client benefits were reduced, I went back to Vanguard. Vanguard refused to reimburse any fees.
Cause that is Vanguard, as it is always to be. You will never get outstanding experience, but you will never be truly disappointed either.
+1
And the reimbursed amount will be reported on a 1099 and be taxable. But it’s better than having to pay it in full.
I don’t see how jumping from brokerage to brokerage to brokerage in order to collect small dollar bonuses is worth the expense and time involved.
Most brokerages charge an ACAT fee to transfer assets to another brokerage. This $50-$75 fee will offset bonus earned on anything but a very large account. If you have a very large account you don’t care about the $100 bonus. The only workaround to the ACAT fee is to liquidate all assets in the account and recognize taxable gains, which more than defeats the purpose. Some brokerages don’t charge ACAT fees, but they also rarely pay bonuses.
It’s already been mentioned that fractional shares of stock and ETFs cannot be transferred and not all mutual funds can transfer to all brokerages, so those assets get liquidated and are subject to capital gains taxes.
Finally, the bonus is taxed as ordinary income.
All this to say…your $50 or $100 bonus is urinated away.
Partially agree, it is worth it if you were planning to move anyways. E.g. if you had wealth management where you pay thousands a year for that service and decided you just wanted to DIY with index funds you could move, get the bonus and also stop the management fees.
I dont waste my time with regular brokerage unless I am unhappy with the firm just like a lot of bank bonuses since they are taxed and it had been a bigger hassle dealing with bank bonuses than the brokerage bonuses. For IRA, especially roth ira’s it can be a better deal since the bonus goes to the account opened so if you open/transfer a Roth account the bonus is tax free. if its a regular IRA it would be tax deferred. Since I had moved the funds from an old 401k it’s been a breeze opening/transferring accounts and does not involve chex inquiries
Michael, your comment is actually terrible advice, but im sure you are not giving it in bad faith (just a matter of not knowing any better on your part, i assume). are capital gains on fractional shares and paying taxes on a brokerage bonus gonna keep you up at night? that’s ok, then just stick to IRAs. i’ve hopped around plenty of brokerages (doing roth IRAs is particularly rewarding) and haven’t yet had to pay any fees that were not reimbursed. maybe im just some kind of genius. jk. no, the trick is to do either a partial transfer (i havent experienced a brokerage that charges on partial transfer of account), and then when fully closing/transferring out, transfer to a brokerage that reimburses fees.
ex. you have $150k in fidelity ira? transfer $120k of holdings to merrill (no fee to transfer), collect $375 bonus, close merrill and tranfer all assets back to fidelity, ask fidelity to reimburse the merrill account transfer fee…..voila, free $375 added to your retirement
this is free money people, and in many cases even easier and less hassle than many of the bank account bonuses (no account maintenance fees, direct deposit, debit purchases)
Ally and Chase brokerage both charge for partial transfers out. Chase sometimes waives a small partial transfer, i don’t know if Ally would waive it, haven’t tried.
When i had an ira with chase and did a partial transfer of 1,000 to another ira, I didn’t realize they charged for partials in particularly cash but. they charged me and wouldn’t reverse the fee, they didn’t charge me for smaller cash transfers out before which is why i thought there was no fee. I stopped doing partials with them and the next opportunity i had to move my entire account i closed the chase account and moved it, i did get that fee reimbursed by receiving firm
There’s so much wrong here, its difficult to know where to start.
Michael, having worked in the investment field for about 10 years now, I will say that about 99.9% of brokerages will cover the ACAT fee that the other institution charges when you switch in order to win your business if you transfer at least $10,000 or more (in addition to paying out the bonus) so you don’t typically get hit with it. Just need to ask for them to credit your account of the ACAT fee, and send them a statement showing the charge.
Most brokerages handle the main asset type, some have issues with brokered cd’s. I usually look for bonuses that are in IRA accounts, if you do an acat, and the asset has to be sold first, it would still not be a taxable event as long as the proceeds dont leave an ira
Generally more money is better than less money. Disclaimer: I am not a money expert.
Also breathing is good. But don’t listen to me. I am not a doctor. Ask your medical professional if you should continue to breathe.
Although it sounds like its coming from a negative sarcastic viewpoint, couldn’t resist the smile
The sarcasm was only that some of our disclaimers are ridiculous.
Hello I am a doctor. Actually breathing is not good as it is addictive. Once you start breathing you can’t really stop. This makes it so if you’re in an area without breathing, your addiction causes you to die. Therefore you should simply not breathe so you don’t get addicted
More money is often not worth the headache associated with the money. For example: a $50 checking account bonus probably isn’t worth the effort. Sure $50 is more than zero dollars but in effort it took to get the $50 I probably could have done something else. Brokerage is a totally different animal than credit cards and checking or savings so people should be VERY careful not to oversimplify on these.
Transfer securities “in kind”, no.