Retirement funds can be moved from one retirement account to another with no tax impact, so long as the taxpayer follows a few simple rules. One of the most important rules is that the funds must land in the new account within 60 days of being taken out of the old account.

Seems simple, right? Well believe it or not, plenty of taxpayers miss that deadline. Some of them are just careless, while others try to use the money for the 60 days, but run out of time and miss the deadline. If you miss the deadline, it's expensive because the Internal Revenue Service then treats the money as a distribution of retirement funds. If you're not yet retirement age, you'll pay regular income tax on the money plus a 10% penalty. Between federal and state taxes and penalties, taxpayers usually lose about 50% of their retirement funds if they do an early distribution.

The IRS used to be pretty forgiving, and allowed taxpayers exceptions to the 60 day rule. But word is that the IRS isn't going to be so forgiving anymore, and taxpayers shouldn't count on receiving the benefit of the doubt. The IRS rules regarding retirement accounts are meant to discourage early withdrawals from the accounts via painful penalties. The government thinks we need an incentive to keep our retirement funds intact, and they're probably right.

If you're moving your retirement funds from one account to another, the best way is to have the financial institution transfer the money directly to the new financial institution. Don't tempt fate by letting the money fall into your own hands. If you transfer the money directly, you don't risk the tax problems.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

Increase your money and finance knowledge from home

Intro to Retirement

Get started early planning for your long term future.

View Course »

Building Credit from Scratch

Start building credit...now.

View Course »

TurboTax Articles

8 Things You Think Are Tax Deductible That Aren't

There?s a fine line between looking to save money on your taxes and taking deductions that will raise eyebrows at the Internal Revenue Service. Some taxpayers are tripped up by expenses that they assume are tax deductions, but don?t qualify under IRS guidelines. Here are a dozen items that can lead to unpleasant surprises in case of an audit.

9 Things You Didn't Know Were Tax Deductions

Few realizations are more painful than realizing that you forgot to include a tax deduction that would have lowered your tax bill or increased your tax refund on your tax return. Here are some tax deductions that you shouldn't overlook.

A Comparative Look at State Taxes

Ever wondered which state has the highest gas tax or the lowest overall tax burden? Interact with the infographic below to compare income tax, property tax, and other taxes by state.

Add a Comment

*0 / 3000 Character Maximum