If you are considering rolling over your traditional IRA — 401(k), 403(b) or other retirement plan — from one account to another or from one financial institution to another, you want to avoid unnecessary taxes and penalties. Here are some basic IRA rollover rules to make the process as simple and tax-optimized as possible.
1. Do not sit on your funds — you only have 60 days! The 60-day rule states that once you receive the funds from your IRA for a rollover, the Internal Revenue Service will allow you 60 days to complete the rollover to another IRA. If you wait longer than 60 days, you will be required to declare the funds as taxable income and report them on your tax return, making them subject to current tax rates. To make matters worse, if you did not reach age 59.5 when your IRA money was distributed, you may have to pay a 10% withdrawal penalty. You worked hard for that money; do not lose it by failing to complete the rollover on time. If you can, figure out where the money is going before you receive the funds.
2. Adhere to the "once-a-year IRA-to-IRA" rule: After you have rolled over your IRA’s assets or any portion of the amount into a new account, you cannot make another rollover from the same IRA for at least one year. Otherwise, the IRS will treat the additional rollover amounts as taxable income.
For example, if you own two IRAs and decide to take money from the first account to create a new — or third — IRA, you cannot make another tax-free rollover from either IRA #1 or IRA #3 for at least one year. However, you can move funds tax-free from your second IRA into yet another account because, within the previous year, you had not moved money into or out of that account.
3. Your RMD cannot be rolled over: The IRS allows you to make tax-free rollovers from your IRAs up until you reach the age of 70.5. From that age forward, you are not allowed to rollover your annual required minimum distribution (RMD) because it will be considered an excess contribution to your account.
One of the best ways to avoid any IRS penalties due to a rollover blunder is to request a "trustee-to-trustee" transfer. With this form of IRA transfer, the financial institution holding your IRA will transfer those assets directly to another financial institution, thus bypassing the need for you to take possession of the funds temporarily. While a transfer is not technically a rollover, it can be done an unlimited number of times, and is not reported as a distribution, which exempts you from the one-year waiting rule.
It is easy to follow these simple IRA Rollover guidelines. By doing so, you can avoid the most common mistakes and realize maximum benefit from these vital, tax-deferred accounts.
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