Personal Finance

Common 401k Rollover Mistakes

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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 Distribution Rule 

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

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 Rollover 

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 your behalf. 

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 qualified plan.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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