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

Timing Your Spending

How to pay less by changing when you purchase.

View Course »

Banking Services 101

Understand your bank's services, and how to get the most from them

View Course »

TurboTax Articles

A Brief History of Income Taxes

Did you know President Abraham Lincoln, one of America's most beloved leaders, also instituted one of its least liked obligations - the income tax? In this brief history of taxes, see the historical events which shaped income taxes in the United States today.

What Is a Schedule M IRS form?

Note: The content of this article applies only to taxes prepared for 2009 and 2010. It is included here for reference only. In order to take the making work pay tax credit, the IRS requires you to prepare a Schedule M with your federal tax return.

Video: Tax Filing Requirements for Children

Depending on how much money they made during the year, your children may very well have to file for taxes. Learn about tax filing requirements for children with help from TurboTax in this video on tax tips.

Add a Comment

*0 / 3000 Character Maximum