- If you’re saving for retirement with a 401(k) or individual retirement account, it’s easy to lose money due to taxes and penalties when moving money between accounts.
- Denise Appleby, CEO of Appleby Retirement Advisory, discusses three of the biggest delegation mistakes.
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“The biggest one is breaking the annual IRA-to-IRA rollover rule,” Appleby told CNBC. “And that’s because people are impatient.”
In general, he explained, you can’t make more than one IRA-to-IRA rollover in a 12-month period. Otherwise, you must include the carryover amount in gross income, and it may be subject to a 10% early withdrawal penalty before age 59½.
Additionally, the IRS considers the additional rollover as a too much contributionThis triggers a 6% annual tax for each year the money remains in the new IRA.
Another common mistake is missing the 60-day retirement plan renewal deadline, Appleby said.
You have 60 days to complete a retirement plan or IRA rollover, and the clock starts ticking when you receive the transactions, he explained.
“People have good intentions and then life happens,” he said. Generally, missing the 60-day deadline means the money is treated as a taxable distribution; IRS disclaimer.
Most retirement plan distributions are taxable and carry a 10% early withdrawal penalty unless you qualify. one of the exceptions.
However, these exclusions are account-specific and may not apply once funds are transferred from a 401(k) to an IRA (or vice versa). “This happens quite often,” Appleby said.
For example, there is a 10% penalty exception for first-time home buyers up to $10,000 for IRAs, but not for 401(k) plans. And when withdrawing money from an IRA, there’s no exception to leaving your job at age 55 or older, known as “separation from service.” This is often true of employer plans such as 401(k)s.
That’s why you should check the list before turning over funds to see if you lose eligibility due to certain exceptions, he said.