Switching online brokers: Here’s how to transfer your investments to a new account

Investing is more popular than ever, and there are many high-quality choices available for investors when it comes to selecting an online brokerage. And with so many brokers vying for a piece of the enormous investment pie, many have slashed fees and offer strong bonuses for new customers.

Thanks in part to all of this competition, online brokerages offer investor-friendly benefits. Most offer no commissions on stock and ETF trades, and many allow you to buy fractional shares — as small as one one-hundred-thousandth of a share, in some cases. So, you don’t have to shell out $1,000 or more for a single share.

As a result, you may want to consider switching brokers, especially if you have accounts at an older brokerage that still charges high fees. However, simply selling your shares at your current broker and transferring cash to the new one could result in a number of issues. Although the process isn’t always easy, it can be well worth it if you’re paying high fees.

When to consider switching brokers

Switching brokers isn’t a minor decision, especially if you have a large portfolio. But there are many reasons why you may want to switch. Your existing broker may have any number of issues:

• High fees/commissions. Many brokers today have very low or no commissions. The same is true for monthly fees, inactivity fees, and minimum balances. If your broker is burdening you with any of these, it may be time to look elsewhere.
• Poor or minimal customer service. If your broker charges no fees whatsoever, it may not offer much in the way of customer service. For some traders and investors, that’s no problem. But if you occasionally or often need help from customer service, it’s important to work with a broker that offers it.
• Outdated website or a wonky app. User experience on broker websites or mobile apps can vary greatly. Some offer advanced trading tools, an easy-to-use interface, and extensive educational tools. If your broker’s website is arcane and difficult to use or your financial app seems to keep crashing, it might be time for a change.
• Limited investment options. Not every broker is created equal in terms of investment options. Besides the usual domestic stocks and ETFs, some offer international stocks, low-cost options trading, mutual funds and other more arcane things such as cryptocurrency, but not all do. If the investments you want to make are not available with your broker, you may want to shop around.
• Proprietary funds. Some companies may offer some of their own proprietary mutual funds only to customers of their brokerage. So if you’re looking for a specific fund, it may be available only at a specific brokerage. Alternatively, if you switch brokers, you may not be able to continue buying those funds elsewhere, so it can cut both ways.

A new broker may offer more favorable options for any of the above, which would be an added benefit of switching. Thus, before pulling the trigger, you should do your own research and consult a tax professional where appropriate.

How to transfer brokerage accounts

Switching brokers is not uncommon for any number of reasons, including those mentioned above. If you decide you do want to switch, you have two ways to move your money.

Cash transfer

The most basic way to move your investments from one broker to another is a cash transfer. If you have a brokerage account, this isn’t too difficult. You simply sell all of your securities and then move the cash to the new brokerage. You may not even need help, since you can withdraw the cash. Then you can invest the money how you choose at your new broker.

If you have a lot of securities though, this approach can be cumbersome, and selling could trigger taxes on any capital gains. Even relatively modest gains could make it more advisable to go with an in-kind transfer so that you can avoid the tax consequences.

In-kind transfer

Fortunately, there is a way to transfer your shares without having to sell. In fact, there is a special clearinghouse just for this process called Automated Customer Account Transfer Service (ACATS). These transfers are commonly referred to as in-kind transfers.

When your account undergoes an in-kind transfer, it essentially means “as is.” In other words, all of your shares, buy/sell history, and cost basis are transferred to the new broker just as they were at the old one.

The easiest way to complete an in-kind transfer is to move an account to a new account of the same type. That means if you have a taxable brokerage account, it should be transferred to another taxable brokerage account. The same applies to a traditional IRA, Roth IRA, and so on. While it is possible to transfer to a new account of a different type, it may delay the process. Plus, you may have to provide additional documentation proving ownership in this situation.

It’s also important to have the right paperwork when switching brokers. You will need to fill out a transfer initiation form with the new broker, also called the receiving broker. This will ensure you not only avoid unnecessary fees but also that the process won’t be delayed.

When filling out your transfer initiation form, you will need key pieces of information, such as:

• Name
• Account number
• Social Security number
• Previous broker’s information
• Whether this is a full or partial transfer

Another thing to keep in mind is that while this form is going to the new broker, it should match the information on file with the old one. If you had a name change, for example, you should use the name on file with the old broker. You can always change it later with the new broker, if necessary.

If you’d like to complete an in-kind transfer, reach out to your new broker to start the process. Here are the steps involved:

1. Contact your new broker

The new broker will be more than willing to help since they want your money invested with them. Ask about their process and let them know what you are planning to move. Also ask about any incentives or promotional bonuses they may have. If they offer a bonus, it could be a good time to open an account with them if you don’t already have one.

2. Gather information from your old broker

You will also need your most recent account statement from the old broker, as well as your buy/sell history. The latter is important because it will help you avoid tax issues if any of the information is lost in the transfer. You will also need the cost basis for your existing securities.

3. Wait for the new broker to move your account

Thanks to ACATS, you shouldn’t have to do anything while your account is being moved. The process normally takes three to six business days. Keep in mind that you will not have access to any of the securities being moved while the transfer is in progress.

4. Get acquainted with your new account

If you had opted for a cash transfer, you might still have quite a bit of work to do with your new broker, including purchasing your investments But with an in-kind transfer, you may just have a few basic items to take care of, such as ensuring your bank account is linked and setting up auto-deposit.

Beware of transfer fees

Something that is often overlooked when requesting an in-kind transfer is possible fees. Perhaps you are focused on the negatives of your old broker and how the new broker will be much better. Whatever the reason, many brokers charge a fee if you decide to have your account transferred. Not all do, but there may be a fee of up to about $150 for leaving your old broker.

On the other hand, some brokerages offer incentives encouraging people to switch. Although your existing broker may charge a fee to move your account, the incentive the new broker offers can more than make up for that fee. Some brokers offer bonuses of several hundred dollars and may even offer to pay the fees of the old broker if you incur them. Read the fine print carefully on the new broker’s site to see exactly what’s needed to qualify for these promotional incentives.

Tax implications of transferring your brokerage account

One of the biggest reasons to let your new broker handle the account move via an in-kind transfer is the tax implications. If you opt for a cash transfer and sell all of your securities, you could trigger capital gains. And if you sell securities you’ve owned for one year or less, you may run into short-term capital gains, which have an even higher rate than the tax rate for securities owned more than a year.

In addition to the risk of selling securities for cash, there are tax implications if you are transferring retirement accounts. These accounts have special rules when transferring, including a custodian requirement. And if you are under the allowed retirement age, the transfer could be treated as a distribution if not handled properly, resulting in taxes and penalties. Plus, if the transfer isn’t completed within 60 days, that, too, could trigger a distribution.

As you can see, there are quite a few tax considerations when moving your accounts. Your new broker will be familiar with the process and know how to handle it the right way. Allowing the brokerage to take care of the transfer is usually the best way to avoid costly errors.

Bottom line

There are many reasons you may want to switch to a new broker, including high fees, poor customer service, or a frustrating website or app. Whatever the reason, you can transfer your account via cash transfer or an in-kind transfer.

If you work with your new brokerage on an in-kind transfer, the process shouldn’t be too difficult. Just be sure you do your research and have all the information needed to make the switch. Thankfully, your new broker will do most of the heavy lifting once you start the process. And once they do, you’ll be ready to start using your new-and-improved account.

— Bankrate’s Brian Baker contributed to an update of this story.