Blowing the 60-day Deadline. If you take out money from an IRA account, including a Self-Directed IRA account, planning to roll it into another IRA or Self-Directed IRA, consider it a game of hot potato: You have 60 days to get that money out of your hands and into the new IRA. The transaction must be completed in 60 days, or the IRS will deem you to have taken a distribution and charge applicable taxes and penalties on the withdrawal.
Forgetting about the 20 Percent Withholding on 401(k)s. The same 60-day rule applies to rollovers from 401(k)s, but with an added complication: If you take money out of a 401(k) directly, the custodian will withhold 20 percent of what you took out and send it to the IRS, to be credited against taxes. But the 60-day rollover deadline still applies, except that you have to roll over 100 percent of what you took out. You must come up with the other 20 percent from somewhere until you file your taxes, when you will either get credited or get a refund.
If you don’t roll over the entire balance you withdrew from your 401(k) into a new IRA within 60 days, including the 20 percent the custodian withheld to send to the IRS, you’ll have to pay taxes and penalties on the shortage.
Don’t make too many rollovers. In the past, many people would make multiple IRA rollovers involving several accounts, believing that any direct rollovers would be tax-free. A recent tax court decision put an end to that, however, ruling that IRA owners can only execute one IRA-to-IRA rollover per year. This is true even if the rollovers involve different IRAs. The limit is one IRA-to-IRA rollover per year per investor, not one per account.
Note that Roth conversions are not counted as rollovers for this purpose.
Failing to do trustee-to-trustee transfers. A trustee-to-trustee transfer is a transfer directly from one custodian or administrator to another. With a trustee-to-trustee transfer, the cash or assets never enters your hands. You don’t have direct control of the asset, and the 60-day clock doesn’t start ticking. Furthermore, when you do a trustee-to-trustee transfer from a 401(k) custodian, they won’t withhold the 20 percent in taxes. So you don’t have to scramble to deposit another 20 percent out of pocket to avoid paying taxes and penalties like you would if you took a withdrawal directly, intending to complete a rollover to an IRA yourself.
Failing to properly name the IRA assets. If you’re putting assets in a Self-Directed IRA or any other Self-Directed IRA account, be sure to title them properly. For example, if you purchase a rental home for your Self-Directed IRA, something has to go on the title. But you can’t put the property directly in your own name. You aren’t the owner – your IRA owns the property on your behalf. Title the property in your IRA’s name, not your own. For example: “IRA For the Benefit of John K. Doe.”
Note: Transfers don’t count as rollovers. If you have a choice, it is nearly always better to move money from one tax-advantaged account to another via a trustee-to-trustee transfer than via a rollover. Transfers are not reportable to the IRS and you can make an unlimited number of direct trustee-to-trustee transfers period in any given year. The problem tends to arise when IRA owners try to give themselves interest-free 60-day loans from their IRAs.
If you want to take direct control of your IRA assets, and declare independence from Wall Street while opening your IRA to all manner of alternative asset classes, call us at American IRA, LLC today at 866-7500-IRA (472), or visit us online to open an account at www.americanira.com.
Once you open an account, transferring money from another IRA, 401(k) or other tax-advantaged retirement account, or funding it with new money is very easy – and enables you to invest in all kinds of opportunities that most broker-dealer reps can’t or won’t discuss with you.
For more information, call us today! We look forward to working with you!