If you have an IRA and want to roll it over to another retirement account, there's some good news: It's entirely doable. However, a rollover is not without risk. Consider this a primer on the regulations governing the 60-day rule and how you can protect your assets.
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A ticking time bomb
The biggest mistake you can make when rolling one retirement account over to another involves the 60-day rule. Any time you take a distribution from your IRA with the intention of putting the money in another account, you have precisely 60 days to complete the transfer. If you miss that deadline by even a single day, the IRS considers the entire distribution taxable income.
Let's say you withdraw $100,000 from your traditional IRA and plan to move it to another retirement account. However, you somehow miss the 60-day deadline. Depending on your current tax bracket, you could find yourself facing a tax obligation of $24,000 to $37,000 or more. Worse yet, if you're under the age of 59 1/2, you could be hit with a 10% early withdrawal penalty.
The solution: Choose the safe approach by requesting a "direct rollover" (also called a trustee-to-trustee transfer). With a direct rollover, you never have to touch the money. Instead, the funds move directly between the current and new financial institutions, and you have no reason to worry about the 60-day rule.
A withholding trap
Let's say you decide you'd rather the money come to you and you're certain that you won't miss the 60-day window. While this "indirect rollover" is an option, it's important to understand that your current plan administrator will withhold 10% for federal taxes, unless you opt out of the withholding (it's a mandatory 20% withholding if you have an employer-sponsored IRA, such as a payroll deduction IRA, and you are unable to opt out).
For this example, imagine you're rolling $100,000 over from your non-employer-sponsored IRA to another retirement account. If you don't inform the administrator that you don't want taxes withheld, or if you choose a different withholding amount, you'll receive $90,000 instead of $100,000. However, unless $100,000 is deposited into the new account, you'll be hit with taxes and penalties.
In other words, the amount withdrawn from one account must be deposited into the new retirement account for you to avoid an immediate tax bill, and that may mean taking money from your own funds to cover the amount withheld.
The solution: Carefully consider whether you want the responsibility of an indirect rollover -- particularly when it's so easy to set up a direct rollover. If you do opt for an indirect rollover, tell your current administrator whether you want it to withhold taxes.
Having an IRA available to you later in life can be priceless. In the meantime, as you prepare for retirement, the goal is to keep all rollovers as simple as possible.
