Going through the process of an IRA rollover is a necessary step when you change jobs or switch brokerages. While the idea behind moving an IRA from one company to another is simple, there are plenty of ways that you could make mistakes. The biggest mistake that you could make when it comes to rolling over an IRA is simply taking the cash and then handling the rollover at a later date. Here are a few of the common IRA rollover mistakes that you will want to watch out for.
Taking the Cash
When you cash out an IRA, you are subject to severe penalties. For one thing, you will have to pay a 10% early distribution penalty right off the top. Then, on top of that, you will also have to pay income taxes on the entire amount. Depending on what tax bracket you are in, this could be a pretty substantial amount of money that you lose to the government. There is a process for rolling over your IRA without paying taxes. Therefore, you should not just tell your IRA provider to send you the cash and you will later find a new IRA to deposit into. You need to have everything planned out ahead of time. This way you can avoid the fees and keep the full amount of your retirement money.
Forgetting the 60 Day Rule
The 60 day rule is one that you will want to be aware of before you go through an IRA rollover. If you set up the IRA rollover to go through your hands before it goes to another brokerage, then you will be subject to this time limit. If you get the check for the full amount of money and do not get it to the next IRA account within 60 days, it will be treated the same as a cash-out. This means that you will have to pay a penalty of 10% then pay income taxes on the amount. Be sure to make sure that you get the money to your new broker within 60 days.
Ignoring One Year Waiting Period
Another rule that you need to be aware of is the one year waiting period. This applies to making multiple rollovers from the same account. For example, let's say that you have an IRA and you decide you are going to open another IRA account. You then rollover part of the money to the new account. Then later that year, you decide that you wanted to open a third IRA account. If you try to fund the third account from the first account, you would be in violation of the rules. You have to wait at least one year before you can rollover for a second time from the same account. Therefore, you will want to make sure that you wait at least a year before trying to rollover your account again.