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Updated July 16, 2024 Reviewed by Reviewed by David KindnessDavid Kindness is a Certified Public Accountant (CPA) and an expert in the fields of financial accounting, corporate and individual tax planning and preparation, and investing and retirement planning. David has helped thousands of clients improve their accounting and financial systems, create budgets, and minimize their taxes.
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Taxpayers often need to move retirement assets between plans and financial institutions. While financial service providers try to avoid mistakes, they sometimes occur. It is important to know the current regulations for rollovers and transfers among retirement accounts.
When you move your retirement assets from one plan to another, the receiving plan must be eligible to receive the assets. If you move the assets to the wrong type of retirement plan, you lose the tax-deferred status of the moved assets and may also create unintentional tax consequences.
John withdrew his Roth IRA balance of $500,000 and rolled over the amount into a SIMPLE IRA at his local bank. John was not aware that regulations did not allow this type of rollover. Two years later, John hired a tax professional, who discovered the error when she reviewed John's recent tax returns. Unfortunately, it was too late to correct it without consequence. John had to remove the $500,000 from his SIMPLE IRA and because the amount stayed in his account for two years, he had to pay the IRS an excise tax of $60,000 (6% for each year).
Jane deals with two financial institutions. At the first institution, she has a traditional IRA while, at the second, she has both a traditional IRA and a regular (non-IRA) savings account. Jane instructs the second financial institution to transfer assets from her IRA to her IRA at the first financial institution.
A year later, Jane realizes the delivering account number she provided was that of her savings account. She immediately put the money into her IRA at the first financial institution. However, this made the transaction a regular contribution to the IRA, not a plan-to-plan transfer. Unfortunately, neither financial institution detected the discrepancy and prevented the erroneous transaction.
If Jane has already contributed the maximum amount to her IRA, she will have to calculate and fix the excess IRA contribution. If she does not correct the error by the applicable deadline, she will owe the IRS a 6% penalty on the amount for each year it remains in her IRA. However, if she has not yet contributed to her IRA for the year, and the amount is not more than the IRA contribution limit and includes only cash, Jane may leave the amount in the IRA and treat it as her regular IRA contribution.
If you withdraw your IRA assets and roll over the amount within 60 days, the amount is not subject to income tax or the 10% excise tax that applies to distributions that occur before you reach age 59½. This is commonly referred to as a 60-day rollover, and you can use it only once during a 12-month period for each of your IRAs. So if you roll over more than one distribution during the 12-month period, only the first distribution is considered rollover eligible.
Tom, who has yet to reach 59½, holds two traditional IRAs. In April he withdraws $50,000 from IRA No. 1 and, within 60 days, rolls over the amount into IRA No. 2. Tom does not owe any taxes or penalties on the transaction.
Eight months later, John withdraws an additional $40,000 from IRA No. 1 and rolls over the amount into IRA No. 2, also within 60 days. However, the $40,000 is not eligible for transfer because John already rolled over a distribution from IRA No. 1 during the preceding 12 months. John must remove the $40,000 as a return of excess distribution to avoid any penalties.
To avoid common IRA rollover mistakes and penalties, it is recommended that the funds be moved as a trustee-to-trustee transfer. There is no limit on the number of trustee-to-trustee transfers that may occur between your IRAs.
Before moving retirement assets, check with your financial advisor to ensure the transaction is permissible under current regulations. In addition, check to make sure that funds were transferred to or from the right account and in the correct order. You may be able to correct errors without penalties if they are detected early enough.
