Many people who are saving for retirement through a 401(k) or individual retirement account (IRA) often make mistakes when moving money between accounts. Denise Appleby, CEO of Appleby Retirement Consulting, highlights three common rollover mistakes. The first is breaking the one-per-year IRA to IRA rollover rule, which occurs when people are impatient. This mistake can result in the rollover being considered as gross income and subjected to a 10% early withdrawal penalty. Additionally, the IRS treats the additional rollover as an excess contribution, triggering a 6% levy each year.
The second mistake is missing the 60-day retirement plan rollover deadline. Once you receive the proceeds, you have 60 days to complete the rollover, but many people fail to do so due to unforeseen circumstances. Missing the deadline means the money is treated as a taxable distribution, unless you qualify for an IRS waiver.
The third mistake involves losing eligibility for certain exceptions when transferring money from a 401(k) to an IRA or vice versa. For example, certain exceptions for early withdrawal penalties may apply to IRAs but not 401(k) plans. It is essential to review the list of exceptions before initiating a rollover to avoid losing eligibility. By being aware of these common mistakes, individuals can better navigate the rollover process and avoid unnecessary taxes and penalties.