401k Rollover Mistakes to Avoid
401k Rollover mistakes
can be brutal. Have you ever considered rolling your 401k or other
retirement account from one financial institution to another?
Whether it is for higher returns, a greater variety of investments
or better service in general, many times this can be a great move!
If you roll over your plan, there are some
401k rollover mistakes
that many commonly make that you must avoid. These mistakes could
result in unnecessary taxes and a 10% early withdrawal penalty. As
you read below, we will give you an overview of 401k or retirement
rollover rules and tips to keep you out of trouble.
401k Rollover Mistake. Not following the 60-Day 401k
When you have received the funds from your 401k, you have 60
days to complete the 401k rollover to another IRA or qualified
plan. If have not finished the rollover within the time allowed the
amount must be treated as ordinary income in the IRS's eyes. As a
result, you will end up paying income tax on the entire
distribution, which could be a ton! Furthermore, if you were under
the age of age 59.5 when the distribution occurred, you'll face a
10% penalty on the withdrawal.
Don't Forget the One-Year IRA Rollover Waiting Rule
A rollover from a 401k into another IRA may be made only once a
year. The one-year wait period begins when the taxpayer receives
the 401k distribution, not the date when he rolls it over into a
rollover IRA. Keep in mind that this one year rule applies
separately to each IRA account that an individual owns. Also,
another thing to not is that this one year limit does not apply to
transfers from a Traditional IRA account to a Roth IRA.
401k Rollover Mistake: Same Property Rule
This is a very common
401k rollover mistake
. You must rollover the same property to your new IRA. The same
property provision means that you cannot take a cash distribution
from your 401k, purchase other investments with the cash, and then
proceed to rollover those assets over into a new IRA. Should this
occur, you would be hit once again by the IRS treating this
distribution as taxable income.
Remember that RMDs are not Eligible for an IRA
Required minimum distributions is a provision that you must take
income from your qualified plan upon reaching age 70 ½. Although
you are allowed to make tax-free rollovers at any age, if you are
70.5 or older, you cannot rollover your annual (RMD), as this
rollover would be considered an excess contribution. If you fall in
the category where you are required take RMD each year, make sure
that you do not take the current year's RMD amount into
consideration before implementing the rollover.
Additional points to Consider
If you want to avoid the trouble of going through the
withholding and the resulting reporting requirements, you should
probably look strongly at doing direct rollover since that should
be used to effectuate your rollover from your qualified plan. A
direct rollover is reportable, but never taxable. Another key
feature is that there is no 60-day requirement window to worry
about. All that you need to do is to check with your plan
administrator and the institution receiving the rollover regarding
their forms and requirements for facilitating a direct rollover on
Keep in mind that you could possibly move funds the other
direction, too. This means that you may be able to take a
distribution from your traditional IRA, and then proceed to roll it
over into a qualified plan, like a 401k account. Please make a note
however, that your employer is not obligated to accept such
rollovers, so be sure to double check with your plan's
administrator before you initiate the transfer from your IRA.
Similar to dealing with a 401k rollover, certain amounts, such as
nontaxable amounts and RMD's cannot be rolled from an IRA to a