Beware of pitfalls when rolling over your IRA

March 1, 2005

Keep in mind these important rules to avoid potential tax penalties.

A: If all of the requirements are met, your rollover will be tax-free and exempt from the usual 10% penalty on early withdrawals before age 59½. You may also roll over funds tax-free from one regular IRA to another regular IRA. Special rules will apply if your intent is to convert your IRA to a Roth IRA.

There are several reasons for rolling over IRA funds. You may be dissatisfied with the investment return from the IRA or interested in pursuing other investment opportunities. One unique reason might be the need for immediate cash. If you withdraw funds from an IRA but redeposit the funds back into an IRA within 60 days, there are no current income tax ramifications. You are allowed to transfer an IRA to another IRA without tax penalties.

Q: My estate attorney is recommending that I begin to give assets away to my four children during my lifetime in order to avoid large estate taxes at the time of my death. Does this strategy make sense, and aren't there tax issues involved?

A: While the IRS imposes federal gift taxes on donors, it is still possible and often recommended that individuals give away thousands of dollars each and every year, without the imposition of gift taxes. The tax law includes several key exceptions to a potential gift tax liability. If you are able to stay within the gift tax boundaries, you will be able to pass a considerable amount of wealth to family members during your lifetime with no gift tax consequences.