By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management AdvisorSM
Accredited Investment Fiduciary®
There are about a dozen or so common and costly Individual Retirement Account mistakes that I can think of off the top of my head. Rollovers can be a big innocent slip-up, in which the “oops” can be costly.
While it may sound like semantics, rollovers are different than transfers. A direct transfer happens when a custodian of an account sends money or securities in-kind directly to another custodian, with the account being identically registered at both institutions. For example, let’s say Jake Smith has an IRA at XYZ Investments. He wants to move the account to ABC Financial. ABC can send a transfer request with instructions to XYZ. The transfer happens directly between the two companies without Jake directly receiving the funds. This is often an efficient manner to move accounts.
If Jake left his employer and is considering what to do with his 401(k), he would typically have four options. He could leave the money as is in the employer plan, roll over the assets to his new employer’s plan if permitted, cash the account out, or rollover to an IRA. With a rollover, an account owner can actually take possession of the funds. In an indirect rollover, the account owner has up to 60 days to get to money back into an IRA and avoid penalties. If more than 60 days pass and the money has not been placed in an IRA, it becomes a distribution instead of a rollover, subject to full ordinary income taxation as well as premature distribution penalties if the account owner is under 59 ½. While you can not borrow money from an IRA, owners may take advantage of the 60 day rollover provision. But, be careful! It may be a costly mistake if you are not able to get the money back into an IRA on time. Additionally, since 2015, the IRS only permits one indirect rollover in a 365-day period, regardless of how many IRAs you have. Unintentionally violating this rule can also cause taxation and potential penalties of the entire amount withdrawn from the IRA(s).
Ineligible rollovers can also be a source of costly confusion. For example, Required Minimum Distributions (RMD’s) may not be rolled over into another IRA. Account owners may be subject to RMD’s after turning the magic age of 70 ½, or upon inheriting an IRA from another person. Another example is that the type of property must be the same in order to be eligible for a rollover. If you were to withdraw $100,000 of cash from an IRA, purchase stock outside of the IRA with the cash, then roll the stock into the IRA, the rollover would be deemed ineligible. The property going out must be the same as the property going in. If cash is withdrawn from an IRA, cash must be rolled back into an IRA to be eligible for a tax-free rollover. If deemed ineligible, as in this example the entire $100,000 would be considered a distribution subject to taxes and potential premature distribution penalties if the owner is not yet 59 ½, not to mention the lost opportunity of future tax deferral.
IRAs can be powerful tools preparing for as well as navigating through your retirement. The benefits surrounding IRAs may make the accounts well worth your efforts in building them. If you do not follow the rules along the way though, the mistakes can be costly.
LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Wealth Management and can be reached at (715) 343-9600 or firstname.lastname@example.org. www.SchulferAndAssociates.com
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.