Common IRA Rollover Mistakes (2024)

Have you thought about rolling your traditional IRA from one financial institution to another? Maybe you're looking for higher returns, more investment selections, or better customer service. Below is an overview of IRA rollover rules and tips on how toavoid common rollover mistakes.

Key Takeaways

If you leave a job or start a new one, you may need to roll over your retirement account to an IRA.
Rollovers must be completed within 60 days of receiving funds from the old account, and only one rollover is allowed annually.
Direct transfers of retirement account funds to a new qualified account is an efficient transfer method and avoids common rollover mistakes.

The 60-Day Rule

“IRA rules can be tricky and some have even changed over the years, so you need to be careful, otherwise you could pay income tax and penalties," says Dan Stewart, CFA®, president of Revere Asset Management Inc., in Dallas, Texas.

After you receive the funds from your IRA, you have 60 days to complete the rollover to another IRA. “That’s 60 days, not two months," says Marguerita M. Cheng, CFP®, CEO of Blue Ocean Global Wealth, Gaithersburg, MD.

If you do not complete the rollover within the time allowed or do not receive a waiveror extensionfrom the Internal Revenue Service the amount will be treated as ordinary income by theIRS.

You must include the amount as income on your tax return, andany taxable amounts will be taxed at your current ordinary income tax rate. Plus, if you were not59½years oldwhen the distribution occurred, you face a 10% penalty on the withdrawal.

One-Year Waiting Rule

You cannot make a second tax-free rollover of an IRA for one yearafter you distribute assets from your IRA and roll over any part of that amount.

Thislimit on IRA-to-IRA rollovers does not apply to eligible rollover distributions from an employer plan. Therefore, you can roll over more than one distribution from the same qualified plan, 403(b), or 457(b) account within a year.

RMDs Ineligible for Rollover

You are allowed to make tax-free rollovers from your IRAs at any age, but you cannot roll over your annual required minimum distribution (RMD) because it would be considered an excess contribution.

As of January 2023, with the passage of the SECURE 2.0 Act of 2022, you are required to take an RMD each year when you reach the age of 73. Subtract the current year’s RMD amount from your IRA before implementing a rollover. The RMD age will increase to 75 beginning in 2033.

Same Property Rule

Your rolloverfrom one IRA to another IRAmust consist of the same property. This means you cannot take cash distributions from your IRA, purchase other assets with the cash,then roll over those assets into a new or the same IRA. Should this occur, the IRS would consider the cash distribution from the IRA as ordinary income.

If an entrepreneur, aged 57, wants to roll over a portion of her IRA from one financial institution to another but uses some of the IRA assets to buy stock. She purchases the shares and moves the remaining cash into a new IRA. Then, she deposits the shares into the same IRA account, hoping to receive tax-deferred treatment.

The IRS deems the portion of the distribution used to purchase the stock as a cash distribution taxable as ordinary income. Because she is younger than 59½, the IRS would also assess a 10% penalty on the taxable portion of the amount used to purchase the stocks.

Transferring Your IRA

If you move your IRA from one financial institution to another and do not need to use the funds, you should consider using the transfer methodinstead of a rollover. A transfer is non-reportable and is allowed at any time during any period.

“A transfer removes the withdrawal process of the rollover, which ensures the assets go directly to their end account, and investors remove the risk associated with the 60-day rule,” says Mark Hebner, founder, and president of Index Fund Advisors, Inc., in Irvine, Calif., and author of The 12-Step Recovery Program for Active Investors.

“In my opinion, a direct transfer is the most optimal solution to move funds from one IRA to another,” says Carlos Dias Jr., founder and managing partner of Dias Wealth LLC in Lake Mary, Fla.

What Retirement Plans Can I Rollover Into My Traditional IRA?

You can rollover funds from the following accounts to a traditional IRA:

A traditional IRA you inherit from your deceased spouse
A qualified plan
A tax-sheltered annuity plan
A government deferred compensation plan (section 457 plan)

What Is a Direct Rollover?

If you want to avoid the withholding and the associated reporting requirements, adirect rollover, sometimes referred to as a trustee-to-trustee transfer,is a method that should be used to effectuate your rollover from your qualified plan, 403(b) plan, or governmental 457 plan account. Plus, there is no 60-day window to worry about.

What If I Forget to Take My Full RMD on My Traditional IRA?

Failure to take an RMD from a traditional IRA levies an excise tax of 25% of the shortfall. If the error is corrected promptly, the excise tax is reduced from 25% to 10%. This provision begins in the taxable years after December 31, 2022, under the SECURE 2.0 Act of 2022.

The Bottom Line

When changing jobs, employees often choose to roll over their IRA accounts to the new employer. Traditional IRAs can also be moved from one financial institution to another for higher returns or more investment options. However, many rules apply to rollovers, including the 60-day rule, RMD requirements, and same property rules.

Certainly! The article delves into the intricacies of IRA rollovers, covering crucial aspects such as the 60-day rule, the one-year waiting rule, RMDs (Required Minimum Distributions) and their ineligibility for rollover, the same property rule, direct transfers versus rollovers, eligible retirement plans for rollovers, direct rollovers, and penalties for missing RMDs.

Let's break it down:

60-Day Rule: Upon receiving funds from an IRA, you have precisely 60 days to complete the rollover to another IRA. Missing this deadline results in taxation at your current ordinary income tax rate and possibly a 10% penalty if you're under 59½ years old at the distribution time.
One-Year Waiting Rule: After making a tax-free rollover of an IRA, you can't do another one within a year. However, there are exceptions for certain types of distributions from employer plans and rollovers from traditional IRAs to Roth IRAs.
RMDs Ineligible for Rollover: While you can make tax-free rollovers from IRAs at any age, you can't roll over your annual Required Minimum Distribution. Missing an RMD can lead to tax penalties, and the age for starting RMDs increased to 73 as of January 2023.
Same Property Rule: The rollover must consist of the same property; you can't take cash distributions from your IRA, buy other assets, and then roll over those assets. Doing so would be treated as ordinary income by the IRS.
Direct Transfers vs. Rollovers: Direct transfers are a safer method, avoiding the 60-day rule and ensuring direct movement of assets between accounts.
Eligible Retirement Plans for Rollovers: Various accounts, including inherited traditional IRAs, qualified plans, tax-sheltered annuity plans, and government deferred compensation plans, are eligible for rollovers into a traditional IRA.
Direct Rollover: Referred to as a trustee-to-trustee transfer, this method bypasses withholding and reporting requirements and sidesteps the 60-day window.
Penalties for Missing RMDs: Failure to take a Required Minimum Distribution can lead to excise taxes, with a reduction in penalties if promptly corrected.

Remember, these rules and nuances are essential to understand when contemplating IRA rollovers to avoid taxation, penalties, or other adverse financial consequences.