Top 10 IRA Rollover Mistakes

There are many situations in which one may opt to rollover an IRA, such as inheriting an IRA

from a spouse or changing employers. Each case comes with its own set of crucial

considerations as IRA rollovers have common pitfalls that can result in costly errors if not

executed properly.

#1: IRA-to-IRA Rollovers and Roth IRA-to-Roth IRA Rollovers

• Using 60-day IRA rollovers instead of using transfers to move IRA funds
• Once-per-year rule is for all IRAs and Roth IRAs
• IRS has no authority to correct these mistakes
• New client rollover mistakes - not asking about prior rollovers
• Not knowing the exceptions to the once-per-year IRA rollover rule

#2: Non-Spouse Rollovers are NOT Permitted

• Non-spouse beneficiary cannot do a rollover
• Taking a lump-sum distribution 
• Putting a decedent’s IRA funds into your own IRA
• Paying out the entire IRA to a trust beneficiary

#3: Spousal Rollovers

• Spousal rollover before age 59½
• Forgetting to do the spousal rollover at age 59½
• Not naming a successor beneficiary of the inherited IRA

#4: 401(k) Rollovers to IRAs

• Not reviewing all options (IRA rollover is not the only option.)
• Receiving a distribution personally and being subject to 20% withholding
• Not knowing the creditor protection of IRAs in your state
• Not first asking about the NUA (net unrealized appreciation) tax break 
• Rolling over highly appreciated company stock to an IRA
• Not allocating the after-tax portion (basis) to a Roth IRA tax free

#5: After-Tax Rollovers From Plans to IRAs and Roth IRAs

• Not being aware of the allocation rules that allow the tax-free Roth conversion of after-tax plan funds 
• Failing to allocate pre-tax and after-tax amounts to the correct account
• Rolling over all funds to a traditional IRA (rules do not apply to IRA distributions)
• Choosing to receive all funds personally

#6: Roth Conversions (Technically IRA-to-Roth Rollovers)

• Not advising on the income impact of a Roth conversions (other taxes may be triggered or tax benefits lost)
• RMDs (required minimum distributions) cannot be converted
• Choosing to receive all funds personally
• SIMPLE IRA cannot be converted until after 2 years
• Inherited IRAs cannot be converted, but inherited company plan funds can

#7: In-Plan Roth Rollovers (401(k) to Roth 401(k) Conversions)

• Not asking if in-plan conversions are available in the plan
• Not estimating the taxes due on the conversion
• Not checking first if a Roth IRA conversion is available

#8: Rollovers to Any Retirement Account (60-Day Rule) 

• Losing track of the 60-day deadline
• Not knowing about the 20% mandatory withholding from plans
• Not knowing about the self-certification procedures for late rollovers
• Depositing the funds into a non-IRA account
• Choosing a 60-day rollover instead of a transfer

#9: QDRO Rollovers in Divorce (From Plans Only) to Ex-Spouse as Alternate Payee

• Rolling over all of a qualified domestic relations order (QDRO) distribution to an IRA and then taking an IRA distribution before age 59½
• Remember! A QDRO distribution is a 10% penalty exception, but only on distributions from the plans!
• Not knowing that an IRA rollover voids the 10% penalty exception
• Not knowing that QDROs do not apply to IRAs

#10: Rollovers From IRAs Back to Plans

• Rolling over basis into the company plan
• Only pre-tax funds can be rolled to the plan
• Failing to convert remaining IRA basis to a Roth IRA
• Not asking if your plan accepts IRA rollovers
• Not first checking plan restrictions on accessing funds (Funds are now subject to plan rules.)