 | |  | |  | |  | |  | |  | |  |
| Investment Management and Financial Planning |
| | | | | | | | | | | | |
If you don’t know the rules of the game, it’s easy to get fouled out, and when it comes to IRA Rollovers, those fouls can
cost you big money if you are not careful. It’s inevitable, at some point or another we might ditch one provider, advisor or
fund company for another. Or we may leave one job for a new one or simply retire. If you are planning to, or have already
initiated an IRA Rollover, watch out for these common mistakes, because one misstep can cost you dearly.
So what is a Rollover IRA? A rollover IRA is a special type of IRA that is used to receive distributions from an employer
sponsored qualified plan, such as 401k, 403b, defined benefit or profit sharing plans.
The Rules
60 day Rule: Whether you’re rolling over a company retirement account or IRA assets, you have a maximum of 60 days in
which to complete the rollover to another IRA if the distribution is made directly to you, instead of the rollover IRA account.
Failure to complete the rollover in this time frame will result in taxes and possibly penalties. Specifically, you must
include the amount of the distribution as ordinary income on your taxes, and if you are younger than 59 ½ you also get
sacked with a 10% penalty on the withdrawal.
Any rollovers you make involving a traditional IRA must be reported on your tax return for the year the distribution is made.
Your financial institution will typically issue a 1099R documenting the distribution, and the receiving financial institution
will issue a form 5498 documenting the receipt of the funds in the new account.
One Year Waiting Rule: You may not make another rollover from the same IRA to another IRA if you have already
conducted a rollover (full or partial) from that same IRA account. The exception to this rule is a distribution from an
employer sponsored qualified plan.
Same Property Rule: IRA Rollovers from one IRA to another must consist of the same property. Specifically, this rule
prohibits your ability to take a distribution from your IRA and purchase other assets with that cash, only to later deposit the
newly acquired assets into another IRA. The IRS frowns upon this transaction and will consider this as a cash
distribution, which of course, will cause a taxable event.
Hands down, the most effective way to avoid IRA transfer blunders is to request “trustee-to trustee” transfers. This simply
means is that the financial institution holding your IRA assets will provide directions on how to transfer those assets to
an IRA directly to another financial institution. This bypasses the need for you to take possession of the funds (ie. receive
a check payable to you). In most cases, the transfers can be electronically sent directly to the new firm or Fund
Company. In other instances, a check may be sent to the investor, but payable to the new provider or custodian for your
benefit (ie. check payable to Fidelity FBO John Smith).
Frankly, the “trustee-to-trustee” method this is the easiest way to transport your money from one bucket to the next if you
are merely moving your IRA from one custodian to another. A “transfer” is not necessarily considered a “rollover”, can be
done an unlimited number of times, and is not reported as a distribution, which therefore exempts you from the one year
waiting rule.
Not All Rollovers are Created Equal
Pay particular attention to rollovers from employer plans like the 401k. Rollovers are slightly different than “direct
rollovers”. Company 401k direct rollovers allow you to transfer your retirement funds directly over to your new employer’s
retirement plan or into a rollover IRA plan as a trustee to trustee transfer. With a 401k direct rollover, a retirement
distribution check is directly made payable to your new qualified retirement plan or custodian. Conversely, with an
indirect rollover, your 401k plan proceeds are distributed to directly you, but the law requires that the plan administrator
withhold 20% of your funds in an indirect rollover which is sent directly to the IRS. This means, that in order to satisfy the
60 day rule, you’d have to deposit not only the check proceeds from the 401k, but the money withheld for taxes! Ouch.
The bottom line is this, when it comes to rollovers, you better know your stuff--or at least have the proper oversight with a
competent advisor. The IRS is just waiting for you to botch the transaction so they can collect their precious taxes and
penalties. That could spell disaster for you, both in terms of taxes and the wasted opportunity to grow your IRA’s on a tax
deferred basis. So, before you roll….do your homework.
If you liked this article Buzz it up! Click on the Buzz Up! button below or share it with others by clicking on the share button.
cost you big money if you are not careful. It’s inevitable, at some point or another we might ditch one provider, advisor or
fund company for another. Or we may leave one job for a new one or simply retire. If you are planning to, or have already
initiated an IRA Rollover, watch out for these common mistakes, because one misstep can cost you dearly.
So what is a Rollover IRA? A rollover IRA is a special type of IRA that is used to receive distributions from an employer
sponsored qualified plan, such as 401k, 403b, defined benefit or profit sharing plans.
The Rules
60 day Rule: Whether you’re rolling over a company retirement account or IRA assets, you have a maximum of 60 days in
which to complete the rollover to another IRA if the distribution is made directly to you, instead of the rollover IRA account.
Failure to complete the rollover in this time frame will result in taxes and possibly penalties. Specifically, you must
include the amount of the distribution as ordinary income on your taxes, and if you are younger than 59 ½ you also get
sacked with a 10% penalty on the withdrawal.
Any rollovers you make involving a traditional IRA must be reported on your tax return for the year the distribution is made.
Your financial institution will typically issue a 1099R documenting the distribution, and the receiving financial institution
will issue a form 5498 documenting the receipt of the funds in the new account.
One Year Waiting Rule: You may not make another rollover from the same IRA to another IRA if you have already
conducted a rollover (full or partial) from that same IRA account. The exception to this rule is a distribution from an
employer sponsored qualified plan.
Same Property Rule: IRA Rollovers from one IRA to another must consist of the same property. Specifically, this rule
prohibits your ability to take a distribution from your IRA and purchase other assets with that cash, only to later deposit the
newly acquired assets into another IRA. The IRS frowns upon this transaction and will consider this as a cash
distribution, which of course, will cause a taxable event.
Hands down, the most effective way to avoid IRA transfer blunders is to request “trustee-to trustee” transfers. This simply
means is that the financial institution holding your IRA assets will provide directions on how to transfer those assets to
an IRA directly to another financial institution. This bypasses the need for you to take possession of the funds (ie. receive
a check payable to you). In most cases, the transfers can be electronically sent directly to the new firm or Fund
Company. In other instances, a check may be sent to the investor, but payable to the new provider or custodian for your
benefit (ie. check payable to Fidelity FBO John Smith).
Frankly, the “trustee-to-trustee” method this is the easiest way to transport your money from one bucket to the next if you
are merely moving your IRA from one custodian to another. A “transfer” is not necessarily considered a “rollover”, can be
done an unlimited number of times, and is not reported as a distribution, which therefore exempts you from the one year
waiting rule.
Not All Rollovers are Created Equal
Pay particular attention to rollovers from employer plans like the 401k. Rollovers are slightly different than “direct
rollovers”. Company 401k direct rollovers allow you to transfer your retirement funds directly over to your new employer’s
retirement plan or into a rollover IRA plan as a trustee to trustee transfer. With a 401k direct rollover, a retirement
distribution check is directly made payable to your new qualified retirement plan or custodian. Conversely, with an
indirect rollover, your 401k plan proceeds are distributed to directly you, but the law requires that the plan administrator
withhold 20% of your funds in an indirect rollover which is sent directly to the IRS. This means, that in order to satisfy the
60 day rule, you’d have to deposit not only the check proceeds from the 401k, but the money withheld for taxes! Ouch.
The bottom line is this, when it comes to rollovers, you better know your stuff--or at least have the proper oversight with a
competent advisor. The IRS is just waiting for you to botch the transaction so they can collect their precious taxes and
penalties. That could spell disaster for you, both in terms of taxes and the wasted opportunity to grow your IRA’s on a tax
deferred basis. So, before you roll….do your homework.
If you liked this article Buzz it up! Click on the Buzz Up! button below or share it with others by clicking on the share button.
Common IRA Rollover Mistakes to Avoid
by Cathy Pareto, MBA, CFP®, AIF®
by Cathy Pareto, MBA, CFP®, AIF®
| (c) 2008 Cathy Pareto & Associates, Inc. All rights reserved |
The right to download, store and/or output any material on this Web site is granted for viewing use only. Use or viewing of this site acknowledges that you have
read, understand and will abide by our terms of use, legal notices, and disclaimers.
read, understand and will abide by our terms of use, legal notices, and disclaimers.
