Are You Making These Costly IRA Rollover Mistakes?
Introduction
When you’re transitioning from one job to another or retiring, it’s crucial to handle the funds in your Individual Retirement Account (IRA) correctly. A mistake in this process, known as an IRA rollover, can lead to penalties, unwanted tax liabilities, and a delay in your retirement plans. This blog post aims to help you understand key concepts, avoid costly mistakes, and implement practical strategies for 2025. We’ll also address some frequently asked questions on the topic.
Key Concepts to Understand
The first step to avoiding costly IRA rollover mistakes is understanding the key concepts. An IRA rollover involves moving funds from a 401(k) or similar retirement plan to an Individual Retirement Account. This process can be either direct, where your old plan administrator transfers the funds directly to the new IRA, or indirect, where you receive a check and deposit it into the new IRA within 60 days.
The 2019 SECURE Act and the 2020 CARES Act both had significant impacts on IRA rules. For instance, the SECURE Act raised the age for required minimum distributions (RMDs) from 70.5 to 72, while the CARES Act waived RMDs for 2020 due to the COVID-19 pandemic.
Avoiding Costly Mistakes
One common mistake is missing the 60-day deadline for an indirect rollover. If you don’t deposit the check within 60 days, the IRS considers the money as taxable income and, if you’re under 59.5 years old, you’ll also face a 10% early withdrawal penalty.
Another error is rolling over funds from a Roth 401(k) to a traditional IRA, which can trigger a tax liability. Keep in mind that Roth funds should be rolled over to Roth IRAs and traditional funds to traditional IRAs.
Practical Strategies for 2025
Looking ahead to 2025, consider implementing these practical strategies. First, opt for a direct rollover whenever possible. This method eliminates the risk of missing the 60-day deadline and having the funds treated as a taxable distribution.
Second, review your beneficiary designations. The SECURE Act eliminated the “stretch IRA” strategy, which allowed non-spouse beneficiaries to take distributions over their lifetimes. Now, most non-spouse beneficiaries must fully distribute the account within 10 years.
Frequently Asked Questions
Q:
What if I’ve already made a mistake with my IRA rollover?
A:
If you’ve made an error, it’s crucial to seek professional advice immediately. Depending on the nature of the mistake, you may be able to correct it and avoid penalties.
Q:
Can I still do an IRA rollover if I’m over the age of 72?
A:
Yes, you can, but you need to take your required minimum distribution (RMD) before initiating the rollover.
Closing Thoughts
Navigating the ins and outs of IRA rollovers can be complex, especially with the recent changes in tax law. However, with a clear understanding of the rules and potential pitfalls, you can manage your IRA effectively and avoid costly mistakes.
Take Action Now
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