5 Retirement Rollover Mistakes to Avoid

When you’re contemplating a career change, one of the most important decisions you’ll have to make is what to do with the retirement savings you’ve accumulated. If you contributed to a 401(k), 403(b) or a similar employer-sponsored plan, transferring it to another qualified account is the easiest way to take it with you. Rolling your account over is fairly straightforward but there are a few basic rules to keep in mind.

A financial advisor can help you create a plan to reach your retirement goals. Here are a few potentially costly rollover missteps you’ll want to avoid.

1. Missing the 60-Day Rollover Window

You can do a rollover either directly or indirectly, depending on which option is offered by your employer. With a direct rollover, the money from your old retirement account is transferred straight to your new one. If you choose an indirect rollover, your plan administrator sends you a check which you must then deposit into the new retirement account.

To avoid triggering income taxes on an indirect rollover, the money has to be deposited within 60 days of being disbursed. If you miss the cutoff, the IRS characterizes it as a distribution for tax purposes. That means you’ll pay your regular income tax rate on the money you took out. If you’re under age 59 ½, you’ll also have to cough up an additional 10% penalty.

2. Forgetting About the Same Property Rule

When you’re rolling money from one retirement account to another, the guidelines specify the assets have to be the same going in as coming out. This means if your account contains individual stocks or bonds you can’t sell them and use the cash to fund your new retirement account or vice versa. If you do so, the IRS considers it to be a taxable distribution and you may be subject to the 10% early withdrawal penalty.

3. Opting for an Indirect Rollover of an Employer-Sponsored Plan

If you’re rolling over a 401(k), IRA or a similar plan, it’s a good idea to always choose the direct rollover option if it’s available. When you request an indirect rollover, your employer is required by the IRS to withhold 20% of the balance for taxes even if you’re planning to complete the transfer within 60 days.

You also have to replace the amount that was withheld when you finalize the rollover; otherwise, the IRS treats it as a taxable event. Choosing a direct rollover instead simplifies the process and allows you to sidestep a double tax whammy.

4. Rolling Over at the Wrong Time

Once you turn 55, different rules take effect that impact your ability to take money out of your 401(k). If you leave your job and your retirement account stays with your employer you can still take distributions without paying the 10% early withdrawal penalty. When you roll the money over into an IRA or another qualified plan, you lose this advantage.

Waiting too long to roll your retirement assets over can also be problematic. The IRS requires you to take minimum distributions from tax-deferred accounts like 401(k)s once you reach age 73. As a result, the minimum amount you must withdraw each year isn’t eligible for a rollover. Any rollovers of these required minimum distributions (RMDs) are treated as excess contributions for tax purposes, which could potentially raise your tax bill.

See how your account balance and age affect your annual required withdrawals.

Required Minimum Distribution (RMD) Calculator

Estimate your next RMD using your age, balance and expected returns.

Quickly estimate your RMDs and when to take them

RMD Amount for IRA(s)

$--

RMD Amount for 401(k) #1

$--

RMD Amount for 401(k) #2

$--

About This Calculator

This calculator estimates RMDs by dividing the user's prior year's Dec. 31 account balance by the IRS Distribution Period based on their age. Users can enter their birth year, prior-year balances and an expected annual return to estimate the timing and amount of future RMDs.

For IRAs (excluding Roth IRAs), users may combine balances and take the total RMD from one or more accounts. For 401(k)s and similar workplace plans*, RMDs must be calculated and taken separately from each account, so balances should be entered individually.

^*The IRS allows those with multiple 403(b) accounts to aggregate their balances and split their RMDs across these accounts.

Assumptions

This calculator assumes users have an RMD age of either 73 or 75. Users born between 1951 and 1959 are required to take their first RMD by April 1 of the year following their 73rd birthday. Users born in 1960 and later must take their first RMD by April 1 of the year following their 75th birthday.

This calculator uses the IRS Uniform Lifetime Table to estimate RMDs. This table generally applies to account owners age 73 or older whose spouse is either less than 10 years younger or not their sole primary beneficiary.

However, if a user's spouse is more than 10 years younger and is their sole primary beneficiary, the IRS Joint and Last Survivor Expectancy Table must be used instead. Likewise, if the user is the beneficiary of an inherited IRA or retirement account, RMDs must be calculated using the IRS Single Life Expectancy Table. In these cases, users will need to calculate their RMD manually or consult a finance professional.

For users already required to take an RMD for the current year, the calculator uses their account balance as of December 31 of the previous year to compute the RMD. For users who haven't yet reached RMD age, the calculator applies their expected annual rate of return to that same prior-year-end balance to project future balances, which are then used to estimate RMDs.

This RMD calculator uses the IRS Uniform Lifetime Table, but certain users may need to use a different IRS table depending on their beneficiary designation or marital status. It's the user's responsibility to confirm which table applies to their situation, and tables may be subject to change.

Actual results may vary based on individual circumstances, future account performance and changes in tax laws or IRS regulations. Estimates provided by this calculator do not guarantee future distribution amounts or account balances. Past performance is not indicative of future results.

SmartAsset.com does not provide legal, tax, accounting or financial advice (except for referring users to third-party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). Articles, opinions and tools are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. Users should consult their accountant, tax advisor or legal professional to address their particular situation.

5. Choosing the Wrong Rollover Account

The IRS has specific guidelines about what types of retirement accounts you can roll your assets into. Before you try to initiate a rollover you need to make sure the type of account you’ve chosen is eligible to receive the funds. For instance, you can roll a traditional IRA into a Roth IRA but not the other way around. You also want to pay attention to the fees that each type of account carries, both for the rollover itself and ongoing maintenance.

Bottom Line

Piggybank with "rollover IRA" written on it.

Moving your retirement assets from one place to another doesn’t have to be a hassle and the more you understand about how the process works, the better. Taking the time to plan your rollover ensures that your nest egg doesn’t take an expensive hit.

Retirement Planning Tips

Social Security plays an integral role in most Americans’ financial plans for retirement. Knowing how much your Social Security checks may be at different claiming ages is critical to making an informed decision about when to start collecting your benefits. SmartAsset’s Social Security calculator can help you estimate how much your benefits will be.
A financial advisor can help you manage your retirement savings and plan for your golden years. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.