9 myths about brokerage account transfers

M1 Finance October 21, 2020
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The right brokerage is key to making the most of your investments. 

We’re past the days of brokerages that only let you trade stocks. Now, different brokerages offer a variety of features that can help you build your wealth. The trick is to choose the one that best aligns with your strategy

With more investors recognizing long-term investing as a smart, sustainable way to build their wealth, one of the most common questions we hear from clients is “Can I transfer an existing account to M1?”  

The answer is yes, you absolutely can. But as with most things in investing, the details matter.

There’s a lot of misinformation out there, so we condensed thousands of client questions. 

Here are nine common myths about transferring accounts between brokerages, debunked: 

  1. Transferring accounts between brokerages is too much of a hassle to be worth it 
  1. You’ll have to pay taxes 
  1. The fees aren’t worth it 
  1. You’ll lose your transaction history 
  1. The process is too risky 
  1. You can’t transfer mutual funds 
  1. If you want to transfer, it’s all or nothing 
  1. You’ll lose your dividends if you transfer your account 
  1. Transfers count toward your retirement contribution limit 

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Myth 1: Transferring accounts between brokerages is too much of a hassle to be worth it 

If you see a clear opportunity for your investments to potentially perform better – say, at a brokerage that doesn’t charge any fees – your job is pretty straightforward. 

The process of transferring securities from one brokerage to another is complex – but the part that you, the investor, has to take care of is not. 

Here’s what you have to do during the brokerage account transfer process: 

  1. Decide which brokerage you want to use for your investing strategy. 
  1. Choose whether to transfer your investments (an in-kind transfer) or liquidate your investments and make a cash transfer. 
  1. Get an account statement from your current brokerage. 
  1. Open an account at your new brokerage that matches the account type you’re transferring (e.g., if you have an IRA, you must open an IRA). 
  1. Start the transfer by notifying your new brokerage and sending your statement. 

That’s it! Your new brokerage will handle the rest.  

This is likely no more than what you’re already doing as an engaged investor: researching your options and considering the costs and benefits of making one choice versus another. 

Plus, the brokerage you’re transferring to is motivated to help you move your funds quickly: the more customers they have, the more opportunities they have to earn revenue from those customers

Myth 2: You’ll have to pay taxes 

Not necessarily. 

For example, if you do an in-kind transfer, meaning you transfer your stocks from one brokerage to another brokerage, you won’t pay taxes because the transfer isn’t considered a taxable event.  

But if you liquidate the assets you hold at your current brokerage and transfer the money as cash, you may have to pay capital gains taxes on the sale of any securities in a taxable account (like an individual or joint trust account).  

The amount you owe will depend on your tax rate, the type of securities you have, and how long you’ve held them

If your securities are held in a non-taxable account (like a retirement account), you won’t incur capital gains taxes when you liquidate and transfer to a new brokerage. This includes many types of IRAs like traditional, Roth, SEP, etc. 

And, you don’t have to liquidate your retirement account if you’d like to transfer to another brokerage. You can transfer your IRA like you would a taxable account. 

Quick note: 401(k)s are a little different. If you’re thinking about doing a 401(k) rollover, check out “Should you roll your 401(k) into an IRA? 

The right choice for you depends on which type of account you currently have.  

Myth 3: The fees aren’t worth it 

Another common myth we hear from investors considering a brokerage account transfer is that the fees (the fees you’d pay to your current brokerage to close or transfer your account) aren’t worth it. 

This is typically false, and here’s why: 

1. You can recoup the transfer fees via lower platform fees.  

Transfer fees typically range from $50 to $200.  

If you’re transferring from a brokerage that charges fees for account management or purchasing new securities to a brokerage that charges lower (or no) fees, you could make up that difference quickly.  

This depends on how much money you have in your account and how often you update your portfolio: 

2. The fee is likely lower than taxes you’d pay.  

You could avoid the fee by liquidating your account and transferring the cash to a new brokerage.  

In most cases, this would be considered a taxable event, meaning you’d have to pay taxes on your gains (the tax rate would vary based on the type of investments you have and how long you’ve held them).  

If the taxes are greater than the fee, the fee is a good deal. But if you’re transferring an IRA, you don’t have to pay capital gains taxes on the pre-transfer sale of your securities. 

3. In-kind transfers give you peace of mind.  

Even if the fee is larger than the amount you’d pay in taxes, you may still want to pay it simply for the convenience of having someone else handle the process for you.  

In other words, you can think of it as a peace-of-mind fee to make sure your money gets where you want it to be without having to worry about it

And, if you’re considering a transfer you’ve already decided that your new brokerage is better aligned with your investing strategy. 

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Myth 4: You’ll lose your transaction history 

This one may have been true in the past, but it’s not anymore. 

A law passed in 2011 requires brokerages to send your transaction history to your new broker when you transfer. Still, it’s smart to get a copy of your cost basis (the original value of your investment) from your existing brokerage for your records. 

Your cost basis will be retained when you transfer to your new brokerage. This becomes important if and when you pay taxes on the gains of any sales you make in your portfolio; the same holds true for any losses you are potentially trying to harvest. 

Myth 5: The process is too risky 

This is a myth. All investing activity comes with risk, but account transfers aren’t disproportionately riskier. 

Some people get nervous because you can’t make any changes to your portfolio while it’s in transit – usually about seven to 10 business days. 

During that short period of time you will be unable to make any trades on the positions you are transferring. But if you’re primarily investing for the long term – say, for retirement or to save up for the down payment on a home – you probably wouldn’t have been making many trades anyway.  

After all, the whole point of long-term investing is to devise a plan that works on a longer timeframe. Short-term fluctuations will happen whether you transfer or not; they shouldn’t affect your strategy. 

Myth 6: You can’t transfer mutual funds 

It depends on your new brokerage. 

You can transfer mutual funds in kind as long as your new brokerage has an agreement in place to accept the funds or fund families you have money in.  

But if your new brokerage doesn’t offer the same mutual funds, it doesn’t have to be a deal-breaker. There are other ways to get your money transferred. 

For example, you could liquidate your mutual funds at your existing brokerage and purchase similarly structured ETFs at your new brokerage. Many new M1 clients choose to do this, since we don’t offer mutual funds. 

And even though we don’t offer them, we still allow clients to transfer in mutual funds, OTC securities, options, and bonds. If you’re interested in transferring, here’s how we’ll handle it: 

  • Mutual funds: Liquidate them and give you the cash, which you can reinvest as you see fit. 
  • OTC securities: Liquidate and reinvest. 
  • Options: Let them expire. You can’t trade the option while it’s on our platform. If the option is ITM, we will automatically exercise it. 
  • Bonds: Let them mature. You can’t trade these on M1 right now. 

If you have a question about your specific situation, get in touch with us at transfers@m1finance.com

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Myth 7: If you want to transfer, it’s all or nothing 

This one is only half myth. 

If you have an account with Charles Schwab, Fidelity, TD Ameritrade, or any other major brokerage, it is entirely possible to transfer just part of your account to another platform (including M1).  

If you’re looking to transfer part of your account to your new brokerage, be sure to have ready the securities and number of shares you would like to move. 

Some firms, including robo-advisors like Betterment or Wealthfront, will not allow partial transfers. Those platforms only allow full transfers. 

Myth 8: You’ll lose your dividends if you transfer your account 

Consider this myth busted; it’s entirely false.  

Your principal will be transferred on your official transfer date. This is about seven to 10 business days after you initiate the transfer.  

If any dividends are sent to your old brokerage after that transfer date, your new brokerage will sweep them into your new account. 

Myth 9: Transfers count toward your retirement contribution limit 

They don’t. 

Yes, the IRS limits how much money taxpayers can contribute to IRAs (traditional and Roth) each year. As of 2020, that limit is $6,000 (and $7,000 if you’re 50 or older).  

But transferring accounts between brokerages doesn’t count toward that limit.  

This is because when you transfer your account, you’re not adding money. You’re just moving it. The same is true of rollovers and qualified reservist repayments: you can make either of these transactions without affecting your contribution limit. 

The reality is that moving to a new brokerage is no more or less complicated than the other transactions you’d make to manage your finances. If a new brokerage offers features you want and can’t access through your current brokerage, there’s no reason you shouldn’t consider a brokerage account transfer. 

And if you’re a new M1 client… 

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