To avoid unnecessary taxes, those experienced in estate tax planning advise paying close attention when pension funds are transferred and where those funds end up. Moving funds outside the 60-day window allotted by the IRS often carries severe tax consequences.
Failing to transfer money from a pension fund to another qualified account, such as an estate plan, within the allotted time immediately makes the funds taxable. If the money is distributed before a person is 59 ½ the IRS adds on a 10 percent early distribution penalty.
Tax professionals advise directly rolling over funds to another account instead of withdrawing funds and depositing them again. The trustee-to-trustee transfer is a safer way to move retirement money that often represents a person’s lifetime of savings.
In one case, a retiree deposited his entire pension distribution into a joint account that he shared with his wife. During the course of transferring the savings into a new retirement account, the man died.
His wife tried to continue the rollover during the 60-day period, but the IRS denied her the chance to transfer the remaining funds to her own IRA. The surviving spouse was caught in a sticky situation because her husband was alive at the time of the pension distribution. In order for a spouse to complete a rollover, the IRA’s owner must be deceased. The money that had been placed in the joint account became taxable.
Some people see a pension distribution as an opportunity to use the money as a short-term loan. This can backfire, however, as in the case of one person who took funds out of his IRA to help purchase a home for his mother. The idea was to have his mother qualify for a reverse mortgage so he could reclaim his investment. Unfortunately, the processing time for transactions ran longer than 60 days, making the entire distribution taxable.
The lesson that Dallas residents can learn from these cases is that moving retirement money directly from one qualified account to the other is the safest way to ensure that you do not miss the 60-day window and, therefore, are not stuck with a tax dilemma.
Source: Investment News, “Broken Window: Rollover Horror Stories,” Ed Slott, 17 July 2011