Avoid These Deadly Retirement Rollover Mistakes That Could Cost You Thousands

401(k) or individual retirement accounts are great for retirement savings, but moving money between accounts can lead to penalties and taxes. The journey of transitioning funds between retirement accounts, popularly known as rollovers, is a strategic move aimed at bolstering financial security for the retirement years. Despite this, there are several rules that one must follow. Financial penalties may apply if you fail to comply. Here are three rules that you should know:

#1 The once-per-year IRA rollover rule 

Among the pivotal rules is the one-per-year rollover rule concerning Individual Retirement Accounts (IRAs). This rule, often overlooked due to haste, dictates that a single IRA rollover from the same IRA is permissible within 12 months. Disregarding this rule translates to the rollover amount being categorized as gross income, and if the individual is below the age of 59½, a 10% early withdrawal penalty may be levied. Moreover, the additional rollover is tagged as an excess contribution by the Internal Revenue Service (IRS), attracting a 6% penalty annually for each year the funds linger in the new IRA.

#2 60-day rollover deadline

Another common pitfall is the overlooking of the 60-day rollover deadline. It’s elucidated that from the day the proceeds are received, individuals have a 60-day timeframe to wrap up either a retirement plan or an IRA rollover. Despite harboring good intentions, unforeseen life circumstances can cause a deviation from this timeline. Missing this 60-day window typically results in the funds being treated as a taxable distribution unless an exemption is obtained from the IRS.

#3 Failing to take advantage of the exception

It’s imperative to note that a large portion of retirement plan distributions are taxable and may trigger a 10% early withdrawal penalty unless certain exceptions are met. However, these exceptions are intricately tied to specific accounts. They may lose their validity when funds are transferred between different account types, such as from a 401(k) to an IRA or vice versa. For instance, a penalty exception exists for IRAs allowing up to $10,000 for first-time homebuyers, a provision not available for 401(k) plans. 

Conversely, the exception known as “separation from service,” applicable when exiting employment at age 55 or older, is valid for employer plans like 401(k)s but not for IRAs. If an employee who is enrolled in a company retirement plan, like a 401(k) plan, leaves the employer in the year they turn 55 or older, the separation of service rule states that they can withdraw from their retirement plan without incurring an additional 10 percent tax penalty.

Therefore, a thorough review of the list of exceptions before initiating a rollover is crucial to ensure no loss of eligibility for these exceptions.

In summation, adeptly navigating the complex landscape of retirement plan rollovers necessitates a robust understanding of IRS rules and deadlines. Individuals can circumvent the risks of incurring penalties by religiously adhering to the one-per-year IRA rollover rule and the 60-day rollover deadline. 

Furthermore, a deep understanding of the exceptions associated with different retirement accounts can guide individuals in making well-informed decisions during the rollover phase, laying down a solid foundation for a financially secure retirement. If you are unsure of these exceptions, speak with your HR department or consider consulting a financial advisor. 

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