- If you’re saving for retirement in a 401(k) or individual retirement account, moving money between accounts can easily lead to losing your money in taxes and penalties.
- Denise Appleby, CEO of Appleby Retirement Consulting, explains the three biggest rollover mistakes.
Career expert Sarah Doody says the one-year rule is an “outdated belief.”
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“The biggest problem is breaking the annual rollover rule from IRA to IRA,” Appleby told CNBC. “It happens because people are impatient.”
Generally, you can’t do multiple IRA rollovers from the same IRA within 12 months, she explained. Otherwise, the rollover must be included in gross income and she may be subject to a 10% early withdrawal penalty before age 59 1/2.
Additionally, the IRS treats additional rollovers as: excess contributionThis results in a 6% annual tax each time the funds sit in the new IRA.
Another common mistake is missing the 60-day retirement plan rollover deadline, Appleby said.
You have 60 days to complete a retirement plan or IRA rollover, and the clock starts ticking once you receive the proceeds, she explained.
“People have good intentions, and that’s how life works,” she says. Generally, if you miss the 60-day deadline, it means the funds will be treated as a taxable distribution. IRS exemption.
Most retirement plan distributions are taxable, and early withdrawals are subject to a 10% penalty unless conditions are met. one of the exceptions.
However, these exceptions are account-specific and may not apply after you transfer money from a 401(k) to an IRA or vice versa. “That happens all the time,” Appleby said.
For example, IRAs have a 10% penalty exception for first-time homebuyers up to $10,000, but 401(k) plans do not. And when you withdraw money from your IRA, quitting your job at age 55 or older, known as “separation,” is no exception. This is typically valid for employer plans such as 401(k)s.
That’s why you should check the list before rolling over your funds to make sure you don’t qualify for certain exceptions, she said.