What are the IRA rollover penalties? How can they be avoided? It's a simple matter of following the rules laid down by the IRS tax code pertaining to individual retirement accounts.
Of course, you will have to check with your current custodial company, there could be a penalty or two that you are not aware of.
But, when it comes to the IRS, the only possible penalty is incurred taxes and those are easily avoidable.
First, you can avoid IRA rollover penalties by "transferring" the fund.
A transfer is a transaction that is conducted between the two financial institutions.
It does not require that a check be written to you and it is not reported to the IRS.
So, there's no way that you could incur taxes.
But, even if you do decide to take a rollover, as long as you redeposit the fund within 60 days and only take one during a 12 month period, you'll be safe.
You must be sure that the receiving custodial company provides the necessary tax documents.
Don't forget to attach them to the other tax documents at the end of the year, because rollovers are reported to the IRS.
Now, if you are considering converting from a traditional to a Roth account, there will always be some IRA rollover penalties.
Contributions to a traditional account are made with pre-tax dollars or they are deducted from your annual earnings at the end of the year.
Either way, they are not taxed as regular income for the year in which the contribution was made.
Contributions to a Roth account are taxed as regular income.
Qualified distributions are not taxed.
So, in some cases, there are advantages to converting to a Roth, but the converted amount will be subject to taxation for the year that the conversion was made.
If you are about to change custodial companies, you may be interested in self-directing.
With traditional custodial companies, you generally have a few investment choices, but they are typically linked to the stock market, in one way or another.
Self-directing allows you to fully diversify and invest in real estate, structured settlements, car notes, mobile homes or other investment types that may be more lucrative.
No investments, other than those that are guaranteed by the federal government, are without risk, but there is one group that offers a guaranteed return on your investment for the first full year.
If you aren't happy with the results, you could always do something else at the end of the year.
There are no extra IRA rollover penalties for choosing the self-directed approach.
But, you do need to be aware of some specific rules, particularly those regarding real estate, self-dealing, indirect benefits and prohibited transactions.
There are also a few investment types, including collectibles and antiquities, which are not allowed.
Education is really the key to success in any type of investing.
But, when it comes to retirement accounts, it is particularly important.
Learning about the IRA rollover penalties is just the beginning of your education.