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. Budgeting

    Is Living in Europe Cheaper than in America?

    Learn how living in Europe has financial advantages over living in the United States. Discover the benefits to take advantage of when it makes financial sense.
  2. Retirement

    Top 5 Cities To Retire To In Croatia

    Cheaper than the Italian coast along the Adriatic Sea, but full of natural beauty, good food and active sports.
  3. Term

    How Traditional IRAs Work

    A traditional IRA is a tax-advantaged retirement account that includes stocks, bonds, mutual funds and other investments.
  4. Retirement

    5 Reasons Millennials Lead in Saving for Retirement

    Say what you want to about millennials but the one thing they are doing better than any other generation is saving for retirement. Here's why.
  5. Retirement

    Shopping the New Retirement Products

    There are more options than ever for retirement portfolios these days. Choosing the right product comes down to your needs, time and management style.
  6. Retirement

    Longevity Insurance: Can You Afford Life into Your 90s?

    A man who reaches retirement age is likely to live until he’s 84. A woman is likely to make it to 86. But what if you live longer?
  7. Mutual Funds & ETFs

    Top 3 PIMCO Funds for Retirement Diversification in 2016

    Explore analyses of the top three PIMCO funds for 2016 and learn how these funds can be used to create a diversified retirement portfolio.
  8. Retirement

    How Much Should You Have In Your 401(k) To Retire?

    Determining how much money should be in your 401(k) when you retire depends on several variables, many of which are uncertain.
  9. Retirement

    Retiring in Thailand: The Pros & Cons

    It's a lovely land, but before relocating, get the skinny on this Southeast Asian kingdom.
  10. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  1. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  2. What is the maximum I can receive from my Social Security retirement benefit?

    The maximum monthly Social Security benefit payment for a person retiring in 2016 at full retirement age is $2,639. However, ... Read Full Answer >>
  3. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  4. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  5. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
  6. How does my spousal Social Security benefit work?

    If you have never worked or paid Social Security taxes, you will not be eligible to receive Social Security retirement benefits ... Read Full Answer >>
Trading Center