Participating in a retirement plan has many advantages, the primary one being that money in your plan can grow tax deferred until you withdraw the funds. However, there are specific rules that can often trip up plan participants and they inadvertently may trigger current taxation when funds are intended to be rolled over.

This article offers some of the more common pitfalls you should be aware of when moving, withdrawing or transferring funds in your IRA or Qualified Plan.

What are the common reasons participants choose to move funds?

Clients may desire to move retirement funds from one institution to another for various reasons, including:

  • A participant changes banking or wealth management relationships
  • A participant decides to consolidate various accounts
  • A Participant may be looking at different investment options
  • While not recommended, a participant may try to access their funds for a short-term self-loan


How to protect yourself from tax surprises and penalties.

Whatever the reason, you should be aware of the income tax consequences when you move retirement funds. It is important to consult your investment advisor to determine what your rollover options are. The best way is to get a rollover done using a trustee-to-trustee transfer, since a direct transfer reduces the risk that funds actually are outside of a benefit plan. If you have a qualified trustee, it is unlikely you will risk incurring a tax on your trustee-to-trustee transfers.

If a direct transfer is not available, participants can still take action but need to understand the specific rules for indirect transfers. In an indirect transfer, the participant receives the monies and then is required to reinvest them with a new trustee within the 60-day rollover period. Here are some of the conditions you should be aware of:

  • The trustee is required to withhold some of the funds for taxes.
  • The transfer might be completed earlier than the 60th day, if that day occurs on a weekend or holiday.
  • Sending the funds to a new trustee who is located remotely might cause a delay in completing the transfer within the 60-day rollover period.
  • Only one direct transfer may occur within a 12-month period.


Conclusion: Include your advisors in your investment planning

Your investment advisor and tax preparer have the experience and knowledge to help you navigate the complex rules regarding your tax-deferred IRA’s or Qualified Plans. The IRS just released new guidance (Rev.Proc.2016-47) that may factor into your plan rollover considerations or assist with tax planning.

For more information, contact Barry Divine or Thomas Fuller.