Exercise Caution When Rolling Over IRAs

For a variety of reasons, you may be thinking about rolling over your Traditional IRA or 401K to a new or consolidated IRA. Here’s a quick and dirty review of the rules to ensure that you do not incur unnecessary taxes and penalties:

  • 60-Day Rule: Make sure you roll over all of the proceeds you received from your old account into a qualified IRA account within 60 days. If you fail to make a timely roll over, the amount received will be treated as income and, if you are younger than 59 ½ years old, you will also face a 10% penalty.
  • One-Per-Year Rule: Beginning in 2015, you can only make one IRA rollover per 12-month period, regardless of the number of IRAs you own. The purpose of this newly instituted rule is to shut down a loophole whereby individuals were using multiple rollover schemes as short-term tax-free loans.
  • Same Property Rule: Your roll over must consist of the same property. If you receive cash, which you likely will, then you must roll the cash over into the new plan. You cannot use the cash to purchase stock and then roll the stock over into a new account.
  • Alternative Options: Your plans may be eligible for a trustee-to-trustee transfer or direct rollover. In these transactions, the rolled over assets never touch your hands; instead, the old plan pays the proceeds directly to the new plan. These alternatives avoid the potential pitfalls illustrated above. Talk to your plan administrator to find out if these options are available.

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