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Mistakes to Avoid During 401(k) and IRA Rollovers

January 5, 2022
By: Chris Briscoe, Vice President and Wealth Advisor, CFP®

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It is hard to tell just how much the pandemic has changed the future of the way we work, but the past year has definitely seen a large number of people leaving their jobs for a variety of reasons including higher wages, better benefits, flexible work schedules, or just people retiring from the workforce. The “Great Resignation” of 2021 has certainly caused some headaches for employers but has also brought about a great deal of opportunities for employees.

One important thing to keep in mind when changing jobs is your employee sponsored retirement plan.

If you have a retirement plan from a previous job or an individual retirement account (IRA) and are considering consolidating assets, there are ways to transfer funds without being penalized by the Internal Revenue Service if this is the path you chose after carefully reviewing the pros and cons of the options available to you. Transfers can be ‘rolled over’ through a plan administrator or financial institution, but you can also make the switch on your own. Whatever method you decide on, be sure to avoid these common and potentially costly mistakes.


60-Day Rule

If distributions from a retirement fund are paid directly to you, the Internal Revenue Service allows you 60 days to re-deposit the money from one 401(k) plan or (IRA) into a new retirement account. If you do not complete the rollover within 60 days, any pretax money in your account now becomes part of your taxable income for that year. If you are under 59 ½ years old, you also might incur an early withdrawal penalty of 10% on that money. However, if you chose to do a direct rollover (funds transferred from one advisor/plan directly to the new advisor/plan), it would avoid the 60-day rule.


One Rollover Per Year

In most cases, the IRS limits you to only one rollover involving the same IRA in a given year. The consequences of doing a second rollover too soon can include paying the early withdrawal penalty and adding the previously untaxed IRA funds onto the current year’s taxable income.

There are, however, some exceptions, including:
  • A rollover from an employer-sponsored plan, such as a 401(k), directly to another plan, which a plan administrator can make on your behalf with your authorization.
  • A rollover from an employer-sponsored plan to an IRA.
  • A rollover from a traditional IRA to a Roth IRA, also called a conversion. It is important to note, however, that a required minimum distribution (if you are age 72 or older) cannot be rolled over.

For a complete list of acceptable rollovers from various retirement accounts, check out the IRS’s chart.


Property Must Be The Same

According to the IRS, the retirement money you receive from a 401(k) or IRA needs to be the same money you rollover to the new account. If you repurpose any of it for another use that amount may be subject to tax penalties.

A portion of the funds can be withheld for taxes by an administrator or account manager before distributing the money. If any portion is withheld for taxes, it is up to you to make up the difference from other sources.

For example, if your rollover distribution is $10,000 and 20% is withheld for taxes, it is up to you to make up that $2,000 shortfall when you roll it into the new account. If not, you will pay taxes on that $2,000 and possibly an early withdrawal penalty (if you are under 59 ½).

To summarize, as you move forward with your new career or retirement and decide to begin consolidating assets, it is important that you remember to stay within the IRS guidelines when rolling over retirement funds. Otherwise, you may end up with unexpected costs from early withdrawals and penalties for money that you worked so hard to build up for your retirement.

If you’re looking for guidance or assistance as you plan for retirement, the advisors at Girard are here to help. Contact us to have a conversation.

 

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This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.