About to Rollover an IRA? You may be leaving one provider for another or it may be that you’re leaving a job. Whatever the reason, before you begin initiating an IRA rollover beware of some common mistakes that may jeopardize your account.
Time Limit – you have a 60 day limit in which you must complete the rollover to another IRA. If you miss this deadline, you could pay federal and state income taxes, plus a 10% federal tax penalty on the taxable amount if you’re under age 59 ½.
Same Property – an indirect rollover from an IRA is only tax-free if the “same property” is rolled over within the 60-day period. This rule prohibits your ability to take a distribution from your IRA without causing a taxable event. In order to avoid being taxed keep it simple and transfer or rollover the same assets directly into a new IRA.
Indirect Rollovers – when rolling assets indirectly from an employer-sponsored plan, your 401k will distributed the proceeds directly to you, by law the plan administrator must withhold 20% of the taxable amount, regardless of your intent to rollover the assets with 60 days. However, if you replace the 20% withheld with outside money and then roll 100% of the assets into another IRA or plan your rollover will be tax free. The best course of action would be to elect a transfer to your new employer’s retirement plan or into a rollover IRA plan as a trustee to trustee transfer which would avoid tax withholding requirement.
Waiting Rule – once you have completed an IRA rollover (full or partial) you may not make another rollover from this IRA for a period of one year. There is an exception to this rule if distribution is from an employer sponsored qualified plan.
Simple Oversights – Check your Mail – should your plan send you a check, you only have 60 days to roll it over to another tax-deferred account. Paperwork – make sure all the proper paperwork is in order and properly signed.
In order to avoid jeopardizing your IRA transfer and incur possible loss of tax-deferred growth, do your homework and consult with your financial professional or tax advisor reading your specific situation.
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