A large number of taxpayers move their assets between retirement plans and financial institutions on a daily basis. And while financial institutions and financial services providers try to ensure that mistakes do not occur, they sometimes happen anyway. Consequently, you share the responsibility of ensuring that the rollover or transfer you request is permissible under current regulations.

Tutorial: Retirement Planning

Make Sure Assets Go to the Right Type of Plan
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. (For a summary of the types of plans between which assets can be moved, see Moving Your Retirement Plan Assets?)

Example 1

John withdrew his 401(k) balance of $500,000 and rolled over the amount to his SIMPLE IRA at his local bank. John was not aware that according to regulations he was not allowed to roll over amounts from other retirement plans to his SIMPLE IRA. When preparing his own tax return, John did not detect the error. 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 the error without consequence. But John still had to remove the $500,000 from his SIMPLE IRA and because the amount stayed in his Roth for two years, he had to pay the IRS an excise tax of $60,000 (6% for each year). In addition, John lost the opportunity to accrue tax-deferred earnings, which would have accumulated had the amount been rolled to his traditional IRA.
Had John detected the error within 60 days of receiving the distribution, he could have distributed the amount from his SIMPLE IRA and deposited the amount to his Traditional IRA as a rollover.

Example 2
Jane deals with two financial institutions. At the first she has a traditional IRA. At the second she has 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 that the delivering account number she provided was that of her regular non-IRA account. Consequently, the transaction resulted in a regular contribution to the IRA, not a plan-to-plan transfer. Unfortunately, neither financial institution detected the discrepancy and prevent the erroneous transaction. Because Jane already contributed the maximum amount to her IRA, she must remove the funds as a return of excess contribution. If Jane 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. (For more insight, see How To Correct Ineligible IRA Contributions.)

Note: If 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, providing she did not already contribute to her IRA for the year.

The Rollover Limitation
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 59.5. 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, should you roll over more than one distribution during the 12-month period, only the first distribution is considered rollover eligible.

Example 3

Tom, a 45-year-old taxpayer, owns two traditional IRAs. In April 2012, he withdrew $50,000 from IRA No.1 and rolled over the amount to IRA No.2 within 60 days. The transaction is tax- and penalty-free because it was properly rolled over. In January 2013, John withdrew an additional $40,000 from IRA No.1 and rolled the amount over to IRA No.2 within 60 days. The $40,000 is not eligible to be rolled over, because John had 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 in order to avoid any penalties. Tip: When moving retirement assets between two traditional IRAs or two Roth IRAs, it is recommended that the movement be done as a trustee-to-trustee transfer. There is no limit on the number of trustee-trustee transfers that may occur between your IRAs.

Before moving your retirement assets, check with your financial advisor for assistance in ensuring that 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.

Related Articles
  1. Retirement

    Roth 401(k), 403(b): Which Is Right for You?

    Learn how to decide between a traditional or Roth version of the 401(k), 403(b) or 457(b) retirement plans to help you build your nest egg.
  2. Retirement

    Going Back to Ecuador to Retire: A How-to Guide

    Spending your retirement years in Ecuador can be an affordable and attractive proposition, provided you know the country's laws.
  3. Personal Finance

    The Ten Commandments of Personal Finance

    Here are the simple financial Ten Commandments that, when faithfully followed, can lead to a secure economic future.
  4. Retirement

    Is the New myRA Plan Right for You?

    The new myRA accounts seem to deliver on their promise of being “simple, safe and affordable.” Just be prepared for paltry annual returns.
  5. Retirement

    5 Reasons to Start a Business After You Retire

    It can be beneficial in any number of ways: mentally, occupationally and even financially.
  6. Credit & Loans

    Should I Use My IRA to Pay Off My Credit Cards?

    Cashing in an IRA to deal with outstanding credit card balances may not be the best way, but sometimes it's the best available way. Here's how.
  7. Investing Basics

    Fee-Only Financial Advisors: What You Need To Know

    Are you considering hiring a fee-only financial advisor or one who is compensated via commissions? Read this first.
  8. Retirement

    How Much Money Do You Need to Retire at 56?

    Who wouldn't want to retire early and enjoy the good life? The question is, "How much will it cost?" Here's a quick and dirty way to get an answer.
  9. Retirement

    The Best Strategies to Maximize Your Roth IRA

    If a Roth IRA makes sense for you, here are ways to build the biggest nest egg possible with it.
  10. Retirement

    Suddenly Pushed into Retirement, How to Handle the Transition

    Adjusting to retirement can be challenging, but when it happens unexpectedly it can be downright difficult. Thankfully there are ways to successfully transition.
  1. Can a 401(k) be taken in bankruptcy?

    The two most common types of bankruptcy available to consumers are Chapter 7 and Chapter 13. Whether you file a Chapter 7 ... Read Full Answer >>
  2. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
  3. Who can make catch-up contributions?

    Most common retirement plans such as 401(k) and 403(b) plans, as well as individual retirement accounts (IRAs) allow you ... Read Full Answer >>
  4. Can you have both a 401(k) and an IRA?

    Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
  5. Are 401(k) contributions tax deductible?

    All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
  6. Are 401(k) rollovers taxable?

    401(k) rollovers are generally not taxable as long as the money goes into another qualifying plan, an individual retirement ... Read Full Answer >>

You May Also Like

Trading Center