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Tips for Penalty-Free Retirement Plan Rollovers

Tips for Penalty-Free Retirement Plan Rollovers

In a recent news article, retirement expert Denise Appleby discusses three common rollover mistakes that people make when moving money between retirement accounts. The first mistake is breaking the one-per-year IRA to IRA rollover rule. Appleby explains that impatience often leads individuals to make more than one rollover from the same IRA within a 12-month period. This can result in the rollover being considered as taxable income and subject to a 10% early withdrawal penalty for those under 59½ years old. Additionally, the IRS treats the additional rollover as an excess contribution, which incurs a 6% levy per year.

The second mistake discussed is missing the 60-day retirement plan rollover deadline. Individuals have 60 days to complete a retirement plan or IRA rollover, starting from when they receive the proceeds. However, life can often get in the way, causing people to miss the deadline. If this occurs, the money may be treated as a taxable distribution unless one qualifies for an IRS waiver.

The third mistake is not considering the account-specific exceptions to taxable retirement plan distributions. While certain exceptions may apply to 401(k) plans or IRAs individually, they may no longer apply after transferring money between the two. For example, there is a 10% penalty exception of up to $10,000 for first-time homebuyers for IRAs, but not for 401(k) plans. Additionally, there is no exception for “separation from service” when pulling money from an IRA at age 55 or older, which is typically applicable to 401(k) plans. It is essential to review the exceptions list before performing a rollover to avoid losing eligibility for certain exceptions.

In summary, when moving money between retirement accounts, individuals should be aware of the one-per-year rollover rule, the 60-day rollover deadline, and the account-specific exceptions to taxable distributions. Avoiding these common mistakes can help individuals preserve their retirement savings and minimize taxes and penalties.

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