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Four 401k Rollover Mistakes You Need to Avoid

by Scott Lunsford

401k Rollover mistakes can be challenging. Have you ever contemplated rolling your 401k or another retirement fund from one financial establishment to another financial establishment? Regardless of whether it is for higher earnings, a more significant assortment of investments or improved service, very often this could be a fantastic decision!

If you decide to roll over your retirement plan, there are various 401k rollover mistakes that a great number of people usually make that you have got to steer clear of. These errors can easily cause unnecessary taxes as well as a 10% early withdrawal penalty. If you will continue reading, we will provide you with a summary of 401k rollover rules and helpful hints to keep you out of trouble.

Failure to abide by the 60-Day 401k Distribution Rule

Once you have obtained the money from your 401k account, you have only 60 days to execute the 401k rollover transaction to a different IRA or qualified plan. If you haven’t completed the rollover within the time permitted, the entire amount will be considered ordinary income by the Internal Revenue Service. Consequently, you will be required to pay income tax on the entire amount, which would be significant. Additionally, if you are under the age 59 1/2 when the distribution took place, you will also be charged a 10% penalty on the entire withdrawal.

Beware of the 1-year Rollover Waiting Requirement

Any rollover from your 401k into yet another IRA may be completed only one time each year. The one-year waiting period commences when a taxpayer accepts the 401k distribution, not the date when he or she rolls it over into a rollover IRA. Always keep in mind that the one-year regulation is applicable to each IRA account that an individual has. Additionally, another thing to be aware of is that the one-year time limit is not applicable to transfers from a Traditional IRA account to a Roth IRA account.

The Same Property Rule

The same property rule is an extremely common 401k rollover oversight. The account holder has to roll over the same property to the new IRA. The same property rule means that you are unable to take a cash distribution from your 401k, purchase some other investments with that cash, and then continue to roll over those assets into a different IRA. If this happens, you will be charged once again by the IRS as they will consider this distribution as taxable income.

RMDs are not Eligible for an IRA Rollover

The RMD (Required minimum distribution) is a rule that states you must take income from your qualified plan when you reach age 70 ½. Even though you are permitted to put together tax-free rollovers at any age, if you are 70 1/2 or older, you are unable to rollover your annual RMD because this rollover would be treated as an excess contribution. If you are in the category where you are required to take an RMD each year, make certain you do not take the current year’s RMD amount into consideration before carrying out the rollover.

Additional Points to Consider

If you wish to stay away from the challenges of going through the withholding and the reporting requirements, you ought to consider a direct rollover since that ought to be used to effectuate your rollover from a qualified plan. A direct rollover is reportable, but not taxable. An additional key highlight is that there is no 60-day requirement time period to be concerned about. The only thing you need to do is to confirm with your plan administrator and the institution receiving the rollover about their forms and requirements for assisting with a direct rollover on your behalf.

Keep in mind that you may be able to move funds in the other direction as well. This means that you might be able to accept a distribution from a traditional IRA, and then go ahead and roll it over into a qualified plan, like a 401k. Remember to make a note, however, that your employer is not required to accept these rollovers, so be certain to confirm with your plan’s administrator before you begin the transfer from your IRA. Comparable to handling a 401k rollover, certain amounts, such as nontaxable amounts and RMD’s are unable to be rolled over from an IRA to a qualified plan.

For more information about 401(k) rollover planning and how you can avoid costly mistakes, call the financial professionals at The Lunsford Agency at (740) 779-0246 during normal business hours for Chillicothe, Ohio, or contact us through our website at your convenience.

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