With more people and households holding much of their wealth in retirement accounts, it becomes imperative to keep track of these accounts. People tend to change jobs more often and may end up with a number of retirement accounts from various employers. It may be necessary to roll over or combine the old retirement accounts with new or existing ones.

Individuals should learn their options and understand the IRA rollover rules. Without an understanding of the process or of the regulations, it could be very costly. This could involve added penalties, extra fees, and higher income taxes owed.

The costliest IRA rollover mistakes include:

• IRA rollovers that are not complete within the 60-day period
• Not taking advantage of direct rollovers or transfers
• Making more than one rollover in a year

IRA Rollover must be complete within 60 days.

By IRA rules, rollovers to new accounts must be completed within 60 days. This means that the money must be deposited in a new IRA before the 60-day period is up. If it is not done within this period, this money will be taxed as ordinary income and taxed at your current tax rate.

Additionally, a 10% tax penalty could be imposed if you are under the age of 59 ½ as this would be considered an early distribution.

Not Taking Advantage of Direct Rollovers or Transfers

If you decide to rollover your IRA account, the best options are to use direct rollover or a direct transfer from one account to another (often called a trustee to trustee transfer). This eliminates unnecessary hassle and could help to avoid extra taxes and fees.

A direct rollover is a payment made directly from the old retirement account to the new IRA account.

A direct transfer is when the financial institution that holds the IRA account sends the payment directly to the new IRA or retirement plan.

If you receive a check that is made out to you as the rollover payment; this is considered an indirect rollover. This indirect IRA payment is also subject to a mandatory withholding of 20%. Additionally, if you do not deposit the full amount of your IRA rollover, including the extra amount of taxes that were withheld into your new IRA, this could be considered taxable income. If you roll over $100,000 but receive $80,000 due to $20,000 being withheld for taxes, the full amount of $100,000 must be deposited into the new IRA account. Otherwise, you may be susceptible to taxes and penalties owed.

But if you deposit the rollover to another IRA account within the 60-day period and include the added 20% that was withheld for taxes, it will be entirely tax free. Of course, using a direct rollover or transfer would also be a tax-free distribution with less to worry about.

Making More Than One Rollover in a Year

Generally, an IRA account cannot have more than one rollover within a year, or 365 days. This means that making a rollover in January after one has been made in December is not allowed, even if they are technically made in different years. The rollover period is a full 365 days and not a calendar year. This, of course, only applies to IRA-to-IRA rollovers and Roth IRA to Roth IRAs.

This money is no longer considered IRA funds if a second IRA rollover is made before the 365 days is up. The money would be fully taxable and considered an excess contribution. Extra penalties and fees would also apply.