Avoiding the 60-Day IRA Rollover Rule

NEW YORK (TheStreet) -- An employer-sponsored plan allows an employee to contribute pretax dollars into an investment account for retirement savings. These plans offer several tax benefits, including tax-deferred contributions until withdrawn, and employers are allowed to deduct those allowable contributions for each participant.

When someone leaves their employer-sponsored plan, they generally have four options to choose from:

  • They can leave the money in the former employer's plan
  • Roll over the assets to a new employer's plan
  • Roll over the assets into an IRA
  • Cash out the account value

Understanding the 60-day rule to rollover those funds is imperative and essential in order to avoid significant taxes and unwanted penalties.

The decision-making process in these instances isn't easy --especially when the person encounters a financial adviser or other counsel providing misleading, inaccurate or conflicted advice. Oftentimes, investors are better off leaving their money where it is, but they unfortunately come across firms and agents with conflicts of interest, who in order to earn commissions or other fees recommend  that they roll over plan assets to an IRA.

Whenever you receive an IRA distribution, you have 60 calendar days from the day you receive it to roll it over, tax-free, to another IRA. The failure to complete a rollover within 60 days means the funds aren't eligible for rollover, and that IRA distribution will be taxable to you. Also, be aware that you are limited to one 60-day rollover every 365 days, but are allowed unlimited direct trustee-to-trustee transfers.

Why choose a rollover?

Rollovers allow investors to preserve the tax treatment of their savings and consolidate assets. In addition, investors may not want to leave  assets with their employer, and rollovers allow them to find more options or use a different financial services provider.

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