Do you consider rolling over your traditional IRA to another financial institution? We can help you reach your financial goals, whether that's higher returns or more investment options.
Some common mistakes should be avoided when you roll over a
traditional IRA. Here are the most common mistakes you may make when rolling
over an IRA and how to avoid them.
A few key points to
take away
- To preserve your tax-advantaged status, you may need to roll over your retirement account to an IRA if you leave or start a new job.
- Only one rollover can occur per year and funds must be deposited in the new account within 60 days.
- It is typically more efficient and can prevent many of these mistakes to transfer retirement funds to a new qualified account directly.
The 60-Day Rule
You need to be careful when dealing with an IRA especially since some rules have changed over the years, otherwise, you could pay income taxes and penalties to the IRS.
To roll
over your IRA to another, you have 60 days after you receive the funds. Unless
you are granted a waiver or extension of the 60-day period by the Internal
Revenue Service (IRS), if you do not complete the rollover within that
timeframe, the amount will be considered ordinary income by the IRS.
The total amount paid
must be included on your tax return as income, and any taxable amounts will be
taxed according to your current, ordinary income tax rate. Furthermore, if you
were younger than 59 ½ years at the time of the distribution, you'll be
penalized by 10%.
One-Year Waiting Rule
For one year after
distributing assets from your IRA and rolling over that amount, you cannot do a
second tax-free transfer of an IRA. The downside is some institutions may
charge you to transfer your IRA.
Rollovers from IRAs to
IRAs are not subject to the limitation on IRA-to-IRA transfers. The limit of
one distribution per qualified plan, 403(b), or 457(b) accounts per year will
not apply to Roth conversions (rollovers from traditional IRAs to Roth IRAs).
RMDs Not Eligible for
Rollover
In general, tax-free rollovers from IRAs are allowed at any age, but your annual required minimum distribution (RMD) cannot be rolled over if you are 72 or older, as it would be considered an excess contribution.
Make sure you remove the current year's RMD
amount from your IRA before you implement the rollover if you are required to
take an RMD every year.
It is impossible to roll over cash distributions from your IRA into another IRA, then purchase additional assets with the cash, and then roll the new (or the same) IRA over.
You can't do that. A distribution from an IRA considered ordinary income would
be considered by the IRS if that occurred.
It is a better idea to use the transfer method in lieu of a rollover if you are simply transferring funds from one financial institution to another.
Transfers are not reported and can be done as often as you want throughout the year.
Rather than going through
a rollover, investors transfer their assets directly to their end account,
which eliminates the 60-day rule risk.