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Avoid tax surprises when making a retirement plan rollover

When you change a job or go through a divorce, you may need to rollover the money in your retirement account. Make a small mistake and you could end up with an unplanned tax bill.

There is a general 60-day limit for rolling funds into a different retirement plan or an individual retirement account (IRA). In the past, if you missed this window, you would have to go through the hassle of requesting a waiver to avoid penalties. The IRS recently announced a new procedure that will help.

Eligibility requirements

The self-certification procedure is detailed in a document posted on IRS.gov. Some of the mitigating factors that allow you to use the new procedure include:

  • A misplaced distribution check
  • Severe damage to your home – for example, the recent severe flooding in Louisiana
  • The death of a family member or a serious illness

After missing the 60-day time limit, you would need to notify the IRS of the circumstances. The IRS will generally accept that your self-certification is truthful and issue a waiver.

One-per-year limit

The general rule is that you can only complete one IRA rollover per year.  A mistake with this rule opens you to unplanned tax consequences such as added income and a 10 percent early withdrawal tax.

Direct trustee-to-trustee transfers are recommended by the IRS to avoid these types of problems in the first place.

If you have questions about the tax consequences of a retirement account rollover, contact a tax attorney. Fixing a simple mistake often requires patience and professional assistance.

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