When rolling money over from 401(k) to an IRA or in contemplating other types of rollovers, there are many mistakes that are made. In my professional career, I believe that it is better to learn from other’s mistakes rather than making them yourself.

With that in mind, we turned to Ed Slott, who i feel is a top expert in this area. To follow is a list published by Ed Slott on the “Top 10 IRA Rollover Mistakes”. (a)

 

1) IRA-to-IRA Rollovers and Roth IRA-to-Roth IRA Rollovers:

Mistakes:

  • Using 60-day IRA Rollovers instead of using transfer to move IRA funds
  • New stricter IRA rollover rules for 2015 (effective January 1, 2015)
  • Once-per-year is for all IRAs and Roth IRAs
  • IRS has no authority to correct these mistakes
  • New client rollover mistakes – not asking about prior rollovers
  • Not knowing the exceptions to the once-per-year IRA rollover rule

2. Non-Spouse Rollovers are NOT Permitted:

Mistakes:

  • Non-Spouse beneficiary cannot do a rollover
  • Taking a lump-sum distribution
  • Putting a decendent’s IRA funds into your own IRA
  • Paying out the entire IRA to a trust beneficiary

3. Spousal Rollovers

Mistakes:

  • Spousal rollover before age 59 1/2
  • Forgetting to do the spousal rollover at age 59 1/2
  • Not naming a successor beneficiary of the Inherited IRA

4. 401(k) Rollovers to IRAs

Mistakes:

  • Not reviewing all 6 options (IRA rollover is not the only option)
  • Receivng a distribution personally and being suject to 20% withholding
  • Not knowing the credit protection of IRAs in your state
  • Not frist asking about the NUA (Net Unrealized Appreciation) tax break
  • Rolling over highly appreciated company stock to an IRA
  • Not allocating the after-tax portion (basis) to a Roth IRA tax free
  • Doing an in-plan converstion before estimating the tax effect

5. After-Tax Rollovers From Plans to IRAs and Roth IRAs

Mistakes:

  • Not being aware of the new allocation rules that allow the tax-free Roth conversion of after-tax plan funds
  • Failing to allocate pre-tax and after-tax amounts to the correct account
  • Taking only after-tax funds out for tax-free Roth conversions (Generally won’t work)
  • Rolling over all funds to a Traditional IRA (rules do not apply to IRA distributions)
  • Choosing to receive all funds personally

6. Roth Conversions (Technically IRA-to-Roth Rollovers)

Mistakes:

  • Not advising on the income impact of a Roth conversion (Other taxes may be triggered or tax benefits lost)
  • Failing to keep track of October 15 recharacterizaion deadline
  • RMDs (required minimum distributions) cannot be converted
  • Rolling over all funds to a Traditional IRA (Rules do not apply to IRA distributions)
  • Choosing to receive all funds personally
  • SIMPLE IRA cannot be converted until after 2 years
  • Inherited IRAs cannot be converted, but inherited company plan funds can
  • Not opting out of the 10% tax witholding (You lose the recharacterization of funds not converted)
  • Failing to notify a CPA about a recharacterization (That recharacterization can occur in the next tax year)

7. In-Plan Roth Rollovers (401(k) to Roth 401(k) Conversions)

Mistakes:

  • Not asking if in-plan conversions are available in the plan
  • Not estimating the taxes due on the conversion
  • Not knowing that the in-plan conversion CANNOT be recharacterized
  • Not checking first if a Roth IRA conversion is available

8. Rollovers to Any Other Retirement Account (60-Day Rule)

Mistakes:

  • Losing track of the the 60-day deadline
  • Not knowing about the 20% mandatory withholding from plans
  • Rolling over after 60 days without an IRS Ruling
  • Depositing the funds into a non-IRA account
  • Choosing a 60-day rollover instead of a transfer

9. Rollovers in Divorce (From Plans Only) to Ex-Spouse as an Alternate Payee

Mistakes:

  • Rolling over all of the QDRO (Qualified Domestic Relations Order) distribution to an IRA na dthen taking an IRA distribution before at 59 1/2
  • Remember! A QDRO distribution is a 10% penalty exception but only on distributions from the plans!
  • Not knowing that QDROs do not apply to IRAs

10. Rollovers from IRAs back to Plans

Mistakes:

  • Rolling over basis into the company plan
  • The pro-rata rule exception
  • Only pre-tax funds can be rolled into the plan
  • Failing to convert remaining IRA basis to a Roth IRA
  • Not asking if your plan accepts IRA rollovers
  • Not first checking plan restrictions on accessing the rollover funds (Funds are not subject to plan rules)

 

Note: (a) Ed Slott and Company, LLC prepared this list and more information can be found at www.irahelp.com

 

Additional Articles

When rolling money over from 401(k) to an IRA or in contemplating other types of…

When rolling money over from 401(k) to an IRA or in contemplating other types of…

Disclaimer:

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Avidian Wealth Solutions, LLC), or any non-investment related content, referred to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Avidian Wealth Solutions, LLC. Please remember to contact Avidian Wealth Solutions, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives to review/evaluating/revising our previous recommendations and/or services. Avidian Wealth Solutions, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of Avidian Wealth Solutions, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.

Financial Planning and Investment Advice offered through Avidian Wealth Solutions (Avidian), a registered investment advisor. Avidian does not provide tax or legal advice and the information presented here is not specific to any individual’s circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer to avoid penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

LET'S TALK