It’s way too easy to run afoul of punitive tax rules when you do an IRA rollover.
If you’ve left your job, doing an IRA rollover of the balance in your company retirement plan is usually a tax-smart move. A rollover allows you to continue to defer taxes on the amount you roll over. But our beloved Congress laid some federal income tax traps for the unwary. Don’t be among the unwary. Here’s how to avoid the pitfalls.
Here’s why doing a direct transfer is key: if you receive a retirement plan check that is payable to you personally or a distribution that is dumped into a personal account via an EFT, 20% of the taxable amount of the payout must be withheld for federal income tax. Then you’ll have 60 days to come up with the “missing” 20% and get it into your IRA. Otherwise, you can’t accomplish a totally tax-free rollover.
If you fail to scrape up the “missing” $60,000 and roll it into your IRA within 60 days, you’ll owe federal income tax on the $60,000 plus you’ll probably owe another $6,000 for the 10% early withdrawal penalty tax . Not good.2.
3. You might not want to roll over company stock held in your retirement plan account In an earlier column, I explained special federal income tax rules that may dictate against rolling over appreciated employer stock that’s held in your company retirement plan and distributed to you after you quit. You may be better off putting those company shares into a taxable brokerage firm account. For the details, see this previous Tax Guy column.
The general rule says that you can withdraw all or part of an IRA balance and then roll it back into the same IRA or another IRA with no taxes owed, as long as you put the money back within 60 days. Great, but there’s a tax trap.
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