Are you transferring money between retirement accounts? Be aware of the rollover rules, which govern the tax treatment of retirement plan distributions.
The key to rollovers is timing. The funds you withdraw must be deposited in another account within 60 days of receipt. If you miss the deadline, the payout is treated as a distribution that is taxable at ordinary income rates, which can reach as high as 39.6%.
Another caution: When you receive a qualified retirement plan distribution, income tax will be withheld, even if you intend to roll over the funds to an IRA within 60 days. But to avoid penalties, you have to roll over the entire distribution, meaning you'll need to replace the withheld amount with other funds. You can’t get a refund of the tax withheld from the original distribution until you file your income tax return.
What if you roll over the net amount instead of replacing the withholding with other funds? You could be hit with a 10% penalty tax for withdrawals from a retirement plan prior to age 59½, unless you qualify for an exception.
Fortunately, tax rules offer a simple alternative to rollovers known as a "trustee-to-trustee transfer." The term means instead of you taking possession of the money, your plan administrator transfers your distribution directly to your new IRA trustee or custodian. This kind of transfer eliminates the need for withholding, as well as the need to keep a close eye on the calendar.
Contact us if you have questions about your retirement accounts. We'll help you steer the right course.
