Not everything can be rolled over to an IRA.
To avoid expensive tax problems, it pays to know which funds are not rollover-eligible. What can happen when ineligible rollovers occur? Two bad things.
One: the funds being withdrawn are usually taxable (except, naturally, for after-tax funds) and may be subject to a 10% early-distribution penalty. Two: the funds rolled over are seen as excess contributions, and may be subject to a 6% penalty.
This can result in considerable tax bills, especially if the failed rollover is substantial – normally the case when an entire plan balance is being distributed. Repercussions for the advisors guiding these clients include: lost trust, lost business, and even potential legal action. Advisors need to be a step ahead and ensure that clients consult with them prior to moving any IRA or plan funds. There is simply too much at risk. Plus, the tax laws are quite unforgiving vis-à-vis ineligible rollovers.
Most financial planners do know the major three ineligible rollovers:
1. Violations of the once-per-year IRA rollover rule.
2. Missing the 60-day rollover deadline.
3. Distributions to non-spouse beneficiaries – as opposed to direct transfers.
Still, there are many lesser-known examples of ineligible rollovers. Here are a hand-picked seven:
2. After-tax IRA funds
3. Hardship distributions
4. Plan loans – deemed distributions from a loan default
5. 72(t) distributions
6. Different property – IRA-to-Roth or Roth-to-IRA
7. Divorce – IRA funds split in a divorce are taxable and cannot be rolled over to the ex-spouse’s IRA
It behooves advisors to know which retirement funds can and cannot be rolled over, and to advise clients in advance of any funds being moved. Simple advance planning can actually save a retirement account.
For more information, please read:
Avoid these 7 costly IRA rollover mistakes | Financial Planning | OWS