Obviously, qualified retirement plans such as 401(k) plans and IRAs are meant to provide retirement savings. However, if you’re fortunate and don’t have to draw heavily, if at all, on plan and IRA assets, you can preserve a tidy nest egg for your heirs.
In fact, if handled correctly, distributions can be stretched over the lifetimes of several generations. Thus, these vehicles become estate planning tools, as well as retirement planning tools.
As part of your planning efforts, you may transfer funds between accounts, depending on your needs and other factors. For instance, after you retire, you might decide to move your 401(k) assets into an IRA. Normally, distributions from qualified plans and IRAs are subject to tax, plus a 10% penalty, if you’re under age 59½. But you can avoid any dire tax consequences with a timely rollover.
Essentially, you have 60 days to roll over funds between a qualified plan and an IRA (or other combination) without incurring tax. It’s generally recommended that you use a trustee-to-trustee transfer to eliminate any doubt. In other words, you never touch the money that goes directly from the plan to the IRA.
What happens if you don’t meet the 60-day deadline? In that case, the entire distribution is taxable, plus the 10% penalty if applicable.
As a last resort, you can request a waiver from the IRS if you have reasonable cause for missing the deadline. If you qualify, you can self-certify your eligibility for a waiver in certain circumstances (such as an error by the financial institution). But it’s far better to be safe than sorry by ensuring that you complete a rollover within 60 days.
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