There are times when having an IRA can be trickier than anticipated. There are a lot of rules to follow, there are papers that need to be signed, certain accounts that have to be opened, and sometimes it can be intimidating. This is one reason why having an experienced administrator and custodian on your side is so imperative, to help you steer through the (sometimes) bureaucratic ins and outs.
One unexpected trip up that we’re going to be talking about today is rolling over an IRA. Seems like it should be simple, but there are mistakes that could be made that can cause some serious headaches as some of you might already know. And when it comes to IRAs, we are not talking small potatoes; IRAs accounted for about 28% of all U.S. retirement assets, which totaled $19.5 trillion at the end of 2012. And this market is only going to get bigger, because, at the end of 2018, Americans rolled an estimated $451 billion into IRAs, making this an $8 trillion marketplace. This is part of the reason that there’s a lot of red tape. This is also why it takes time and patience and know-how. The best way to avoid the headaches is to avoid the potholes, to begin with.
The 60 Day Rule
The 60-day rule is one that you will want to be aware of well before you go through an IRA rollover. If you set up the IRA rollover to go through your hands before it goes to another brokerage, then you will be subject to this time limit. If you get the check for the full amount of money and do not get it to the next IRA account within 60 days, it will be treated the same as a cash-out. This means that you will have to pay a penalty of 10% then pay income taxes on the amount. The solution to this is to be sure to make sure that you get the money to your new broker within 60 days to avoid this mistake.
Leaving Assets in a Former Employer’s Retirement Plan
When you leave an employer, you typically have the right to roll over your entire vested balance into an IRA. A few reasons that you should is that you may gain access to a much wider array of investment options through your new employer, or administrator, they may offer attractive services like a gold-backed IRA, or a self-directed IRA, which help to diversify. Also, your beneficiaries may be able to take distributions over their lifetimes, which allows for a longer period of tax deferral that could extend even after your death, and you can avoid the 20% mandatory withholding for distributions if you rollover your retirement plan to an IRA.
Taking the Cash
When you cash out an IRA too early, you will be subject to some serious penalties. For one thing, you will have to pay a 10% early distribution penalty right off the top, then, on top of that, you will also have to pay income taxes on the entire amount. Depending on what tax bracket you’re in, this could be a pretty substantial amount of money that you lose to the government. There is a process for rolling over your IRA without paying taxes, so you should not just tell your IRA provider to send you the cash and you will later find a new IRA to deposit into. You need to have everything planned out ahead of time, this way you can avoid the fees and keep the full amount of your retirement money.
One Year Waiting Period
Another rule that everyone needs to be aware of is the one-year waiting period, it applies to making multiple rollovers from the same account. So for example, let’s say that you have an IRA and you decide you are going to open another IRA account, and you then rollover part of the money to the new account. Then later that year, you decide that you wanted to open a third IRA account, but if you try to fund the third account from the first account, you would be in violation of the rules, because you have to wait at least one year before you can rollover for a second time from the same account. The solution is to make sure that you wait at least a year before trying to rollover your account again.
Navigating the retirement waters can be a bit tough at times, but with an experienced administrator, like Accuplan, at your side, there’s very little that we cannot handle together.