November 19, 2018Individual Investment Management

Avoid the IRS Rollover Trap! As 2018 rolls to a close, people across the country will "roll over" old IRA, 401k, and company plans....and accidentally cost themselves thousands of dollars in taxes. 

What is a "rollover?"...When you move money from one company retirement plan or IRA into another company plan or IRA, this is considered to be a "rollover" by the IRS.  The purpose of a rollover is to protect assets from taxes in the current year - but there's a right and wrong way to do it.

What you need to know....There are two ways to move retirement money from one account to another:
1.  Take a distribution and re-deposit:   In this case the owner withdraws money from one account, takes possession of the funds, and deposits it into another company plan or IRA within 60 days to avoid taxes on the entire transfer.
2.  Execute a direct transfer:  In this case the money is transferred directly from one custodian to another without the owner ever taking possession of the funds.  The amount moved represents a transfer between custodians without the individual ever taking possession.

But isn't this the same thing?...In theory......yes.  In the eyes of the IRS.....NO!!   What many people don't realize, is that the IRS allows only ONE rollover per 12 months on your entire pool of retirement money if you take possession of funds during the process - no matter how many accounts you have!  This means that anyone who executes multiple rollovers where they take possession of funds during the year will potentially cost themselves thousands of dollars in extra taxes - and they didn't even know it.  This mistake catches many people across the country every year who are simply trying to consolidate their retirement accounts.

"This mistake catches many people across the country who are simply trying to consolidate their retirement accounts."

How can I avoid this?...When moving retirement monies from one account to another, you should NEVER take possession of funds.  Always have funds transferred "FBO" (For the Benefit Of) your account from the old designated custodian to the new designated custodian. 

TAKEAWAYS???...I am always surprised by how many advisors don't know about this rule.  By not taking possession of funds, you will avoid this trap and keep your retirement on track!