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

    What Does It Cost to Retire in Panama?

    Learn how much it costs to retire comfortably in Panama, and why it has become one of the most popular retirement destinations in the world.
  2. Investing

    Baby Boomer Philanthropy Shifts Wealth Adviser Focus

    Wealth advisers who integrate philanthropy and finance planning can stand out with baby boomer clients.
  3. Retirement

    The 5 Best Retirement Communities in Dallas, Texas

    Discover why the Dallas/Fort Worth area of Texas is a popular retirement destination, and five of the best retirement communities in the area.
  4. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  5. Professionals

    How to Protect Retirement and Help Adult Kids

    Parents can both protect their retirement money and help their adult kids. Here's how.
  6. Retirement

    10 Ways to Save Your Retirement: It's Not Too Late

    It's not too late to start saving for your retirement, even if you took longer to start thinking about it and doing something about it.
  7. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  8. Retirement

    5 Ways to Use Your Home to Retire

    Retirement is going to cost a lot, and for homeowners who face a shortfall, their home can be a source of income. From downsizing to renting, here's how.
  9. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  10. Mutual Funds & ETFs

    Mutual Funds Millennials Should Avoid

    Find out what kinds of mutual funds are unsuitable for millennial investors, especially when included in millennial retirement accounts.
  1. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  2. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  3. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  4. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  5. Are Cafeteria plans exempt from Social Security?

    Typically, qualified benefits offered through cafeteria plans are exempt from Social Security taxes. However, certain types ... Read Full Answer >>
  6. What are the biggest disadvantages of annuities?

    Annuities can sound enticing when pitched by a salesperson who, not coincidentally, makes huge commissions selling them. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!