As situations in life, employment, and savings evolve over the years, you may find yourself reevaluating your finances. You might decide that it’s time to switch up your approach to building retirement savings. Maybe you just want more choices in how to build your retirement nest egg, or to diversify your holdings into alternative assets such as precious metals. In any of these scenarios, you may consider rolling funds into a new account like a self-directed IRA (SDIRA).
As you build your savings and develop a more sophisticated strategy, you’ll want to leverage tax benefits. You should always consult with a qualified tax professional who can guide you through the rules and considerations, helping you optimize your retirement approach. After all, while retirement accounts can leverage tax-deferral strategies to your advantage, you’ll want to make sure you’re following the rules.
These rules can trickier when moving funds between accounts. Because you are generally dealing with tax-deferred assets (except for Roth accounts, where taxes are paid upfront), the IRS can already get pretty exacting about how to make contributions, or how to take withdrawals or distributions. How and when assets are moved or held can have tax consequences, and not following the rules can result in penalties.
Below we’ve highlighted some of the more common IRA and 401(k) rollover mistakes that we’ve observed, so that you can get a better sense of what you need to keep in mind as you manage your retirement savings.
Of course, your dedicated Precious Metals Specialist is always on-hand to work directly with you to step through any rollover or similar processes. Additionally, we always recommend speaking directly with a qualified tax professional to obtain tax advice for your particular situation.
#1 – Breaking the 60-Day Rule
If you take a distribution from an IRA or retirement plan, you will have to pay taxes on the funds at your ordinary income tax rate. If you are younger than 59 ½, you’ll also likely face a 10% early withdrawal penalty.
The only exception to these fees and penalties when removing money from a retirement account can occur if you deposit that same amount back into the original or another IRA or plan within 60 days of withdrawal.
This 60-day rule is at the core of an “indirect rollover,” which effectively gives an accountholder a pseudo loan—marked “pseudo” since you cannot technically take a loan from IRA savings.
There are two common scenarios where the 60-Day Rule tends to appear:
- If you leave your job where you had a retirement plan or account, you can elect to have a check for the full balance of the account sent to you. You have 60 days from the issuance of the check to open and roll over that money into another eligible plan, like an IRA. If you complete this rollover—known as an indirect rollover—within the 60-day period, you won’t have to pay taxes or any early withdrawal fee on the amount.
- If you have a large expense coming up that you can’t quite cover without dipping into your 401(k) or IRA, you can use the 60-day rule to help tide you over. Know this is considered to be risky because it is very easy to break the rules and face additional costs. You have to replace whatever you take out within this 60-day period to avoid stiff taxes and penalties.If you are moving funds out of an employer-sponsored retirement plan, your employer will be required to withhold 20% of your distribution. This 20% does not get deducted from the amount you are expected to contribute within 60 days, which means you need to be prepared to add that amount on. If you successfully transfer the funds within 60 days, you can expect to have the 20% returned to you when you next file your taxes.
Keep in mind, this is a 60-day rule, not a 2-month rule; the days must be counted exactly from issuance until deposit.
#2 – Multiple Rollovers In One Year
You are only allowed one rollover across all IRAs in aggregate every 365 days. This is known as the “One Year Rule,” or the “One Year Waiting Rule.”
This means that if you first took out funds early, then replaced them or rolled them over into another IRA or similar account within the 60-day window, you will have to wait a full year before you can do another rollover.
If you find yourself with a few accounts you would like to keep open, you can’t simply take out the funds and move funds between the accounts whenever you want. The reason this mistake is among the most common is that many don’t realize this until they’ve already taken the funds out of their account and then find themselves stuck with the tax bill.
There is an important distinction to be made here: this rule only applies to indirect rollovers. You can directly transfer funds as many times as you would like.
#3 – Using RMDs for IRA Rollovers
Until you are 72 years old, you can rollover any of your funds between IRAs at any point in time, as long as you stick to the above two rules.
Once you turn 72, you are forced to take required minimum distributions—or RMDs— each year. You cannot just say that you don’t need those distributions and roll them into another IRA to avoid paying taxes. The IRS considers that to be an excess contribution and will assess taxes and penalties accordingly.
This does not mean that once you are 72 or older, you cannot still rollover funds into a new or different IRA. Just make sure you do so after you’ve already taken your RMD for that year, and be sure to exclude the amount of the RMD from the rollover.
#4 – Roth Five-Year Rule
Roth accounts allow for tax-free distributions in retirement since contributions are made with after-tax income. However, the IRS forbids any distributions of that tax-free money for the first five years. You have to wait five years from January 1st of the year of your first contribution to a Roth IRA or Roth 401(k) before you take any money, including for a rollover.
What happens if you jump the gun? If you make a withdrawal before the initial five years have passed, you will face a penalty of up to 10%.
There are exceptions to this rule; you should consult the documentation for your particular plan or account in order to confirm which ones apply. Generally speaking, the types of exceptions you may expect to see include things like paying for higher education, reimbursement of high medical expenses, and health insurance premiums if you are unemployed.
#5 – Same Property Rule
Let’s say you received a check after leaving your job to close out your old 401(k). You cannot use it to buy any asset like a stock and then roll that new asset into a different account. Likewise, if you withdraw cash from one IRA, you cannot buy IRA-eligible gold coins and deposit those into a Gold SDIRA; if you do, you’ll owe taxes on the withdrawal that tax year, which can also quickly get complicated—and steep.
This does not mean that once you place assets into retirement savings, you’re locked into them forever. The appropriate way to change out asset types would be to roll over the funds into a new SDIRA, and then buy IRS-approved assets like precious metals inside the SDIRA. Again, this process is something your Precious Metals Specialist is on-hand to assist you with.
Easiest Way to Avoid These Mistakes: Direct vs. Indirect Rollovers + Transfers
If you find yourself looking to move funds from one retirement plan or account into another—whether from an old IRA or plan into a new one or more specifically into a self-directed IRA to open up your asset options into things like precious metals—there’s a simple way to avoid the above mistakes: carefully choose how you move your funds.
A transfer is available if you are moving funds directly between IRAs that are of the same type, such as two IRAs, or between a SIMPLE IRA (after the two-year waiting period has passed) and a Traditional IRA. Not only is a transfer not a taxable event, but it does not have to be reported to the IRS and you can complete as many transfers as you would like in one year.
The other main option for moving your funds around is through a rollover, which happens when you withdraw money from one account and then deposit it into another. The IRS has a comprehensive chart that captures the various types of rollovers so that you can understand the ramifications of moving your funds around. You can also review in detail what types accounts are eligible for a rollover.
There are two distinct types of rollovers: direct and indirect.
A direct rollover is available to move funds between an IRA and a retirement plan or between two retirement plans. You—the individual account owner—do not receive the assets in a direct rollover; instead, they are transferred directly between account custodians.
While direct rollovers must be reported to the IRS, they are not taxable unless pretax assets are being placed into a Roth IRA. There is also no limit to how many direct rollovers may be performed in a given year.
An indirect rollover happens when you take a distribution from an IRA or retirement plan and then place it into another IRA or retirement plan of the same type. As noted above, you have 60 days to successfully move these funds over before you start to face penalties, and you can only carry out one indirect rollover per year.
This all makes the option of using a transfer—rather than rolling funds over between accounts—likely the preferable option when you have it, followed by a direct rollover. Most financial advisors recommend avoiding indirect rollovers wherever possible.
While these rules may seem complicated, each one is in place for good reason. The IRS does not want to make way for any maneuvering of funds between multiple accounts that lets individuals off the hook for paying their tax bills. And while a transfer or even direct rollover is likely going to be your best bet for moving retirement savings with minimal fees and hassle, you should always discuss the move with your account administrator or tax professional.