Why Double Check Your Retirement Transactions? | Ed Slott and Company, LLC

Why Double Check Your Retirement Transactions?

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

It has been reported that Lindsay Lohan recently posted a message showing an Arabic phrase in the background that she translated as saying, “You’re beautiful.” Reportedly, the word actually meant donkey. Now, I don’t know if any of this actually is true since I found it on the internet, but to me it reinforces the concept of double check, triple check, and then, maybe, check again.

This is true of your retirement accounts and your retirement transactions. When you move retirement funds, double check that they go to the right account.

IRA funds generally need to go to an IRA account, unless you are doing a Roth conversion, which sends them to a Roth IRA account. Roth IRA funds need to go to a Roth IRA account, unless you are doing a recharacterization, which reverts them back to an IRA account.

Your retirement funds should never end up in a non-retirement account as this means the loss of all future tax deferral. Also, all pre-tax funds will become taxable and might be subject to the 10% early distribution penalty.

Be careful if you are moving the funds online. Read the screens carefully. More than one individual has “accidentally” moved their retirement funds to a non-IRA account.

Be careful when investing in non-traditional investments. Individuals are frequently told that the investment can be done with IRA funds. While this is true, the IRA funds must still be held by an IRA custodian, and this might not be the company offering the investment. Simply putting the word IRA in the title of the account is not sufficient.

IRAs cannot be gifted or transferred during life. You cannot transfer your IRA to a spouse, unless it's done through a divorce proceeding, and you cannot transfer your IRA into a trust.

Most of these mistakes, if not corrected, end up with the retirement funds being taxed. Oftentimes, the correction process involves requesting a private letter ruling (PLR) from IRS. This is an expensive and time-consuming process. The IRS fee ranges from $500 (for a small 60-day rollover waiver) to $10,000, and you have to pay someone to prepare the PLR request. It currently takes an average of nine months to get a ruling from IRS.

Who makes these mistakes? Everyone – the account owner, the financial advisor, the office staff of the financial advisor, the IRA custodian, the CPA, the attorney.

How do we know about all these mistakes? We hear about them from clients who do things on their own, from the public, from IRS private letter rulings, and from court cases.

Don’t let any of these errors jeopardize your retirement savings. Double check your IRA transactions. Look at your statements. Know what is going on with your hard-earned money. Learn from the mistakes of others. It is cheaper that way.

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