A large number of taxpayers move their retirement plan assets between plans and financial institutions on a daily basis. While financial institutions and financial services providers try to ensure that mistakes do not occur, they sometimes happen anyway. It's important to know that, even if the institution made the mistake, you share the responsibility of ensuring that the rollover or transfer you request is permissible under current regulations.

Key Takeaways

  • Make sure that the retirement plan to which you move your assets is eligible to receive them.
  • Scrutinize your transactions for clerical errors that may inadvertently flout regulations.
  • Sixty-day IRA rollovers are limited to one in every 365 days, but trustee-to-trustee rollovers are unlimited.

Move Your Retirement Plan Assets to the Right 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.

It’s vital to detect any errors early, so that you might avoid taxes and penalties.

Example 1: Choosing the Wrong Account

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. 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 it without consequence. John had to remove the $500,000 from his SIMPLE IRA, and, because the amount stayed in his account 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 on the $500,000, 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 it to his traditional IRA as a rollover.

Example 2: Making a Clerical Error

Jane deals with two financial institutions. At the first she has a traditional IRA, while at the second she has both 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 savings account. She immediately put the money into her IRA at the first financial institution. However, this made the transaction a regular contribution to the IRA, not a plan-to-plan transfer. Unfortunately, neither financial institution detected the discrepancy and prevented the erroneous transaction.

If Jane has already contributed the maximum amount to her IRA, she will have to remove the funds as a return of excess contribution. If she 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. However, if she has not yet contributed to her IRA for the year, and 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.

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 59½. 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. Therefore, should you roll over more than one distribution during the 12-month period, only the first distribution is considered rollover eligible.

Example 3: Doing the Wrong Kind of Rollover

Tom, a 45-year-old taxpayer, owns two traditional IRAs. In April 2018 he withdrew $50,000 from IRA number one and rolled over the amount to IRA number two within 60 days. The transaction is tax- and penalty-free because it was properly rolled over. In January 2019 John withdrew an additional $40,000 from IRA number one and rolled the amount over to IRA number two within 60 days. However, the $40,000 is not eligible to be rolled over, because John had already rolled over a distribution from IRA number one during the preceding 12 months. John must remove the $40,000 as a return of excess distribution in order to avoid any penalties.

To avoid this 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-to-trustee transfers that may occur between your IRAs.

The Bottom Line

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 enough.