Tax Guy: Common IRA rollover tax traps — and how to avoid them

by | Jun 30, 2022 | Stock Market

If you’ve left your job, doing an IRA rollover of the balance in your company retirement plan is usually a tax-smart move. A rollover allows you to continue to defer taxes on the amount you roll over. But our beloved Congress laid some federal income tax traps for the unwary. Don’t be among the unwary. Here’s how to avoid the pitfalls. 

1. Arrange direct transfer from company plan into your IRA After exiting your old job, you’ll probably want to roll over money from your former employer’s qualified retirement plan (or plans) into an IRA. That way, you gain full control over the funds while continuing to defer taxes. But there’s a tax trap to avoid. Dodge it by arranging for a direct trustee-to-trustee transfer from the plan into your IRA. In other words, the check or EFT from the plan should go directly to the trustee or custodian of your IRA. While you must have an IRA set up and waiting to receive the transfer, the account can be empty before that.    Here’s why doing a direct transfer is key: if you receive a retirement plan check that is payable to you personally or a distribution that is dump …

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