Pitfall 2: Not Rolling Over the Same Assets

From AIG Funds

You will pay tax if you cash out the stock and roll over the money instead!

Rollover mistakes - cashing out stocks

In addition to the 60-day rule, there is also a same property rule when completing an IRA-to-IRA rollover. An indirect rollover from an IRA is only tax-free if the same assets (for example, stocks, bonds or cash) are rolled over within the 60-day period. For example, the IRS does not allow investors to withdraw stocks from an IRA, sell them and roll over the cash proceeds into a new IRA or plan. If that’s done, the entire distribution amount becomes taxable, and you may end up paying federal and state income taxes of up to 45%!

You can easily avoid this tax trap by rolling over the same assets, or even better, by electing a transfer or direct rollover. If the goal is to ultimately roll over your assets, why make it more complicated than it needs to be? Keep things simple by transferring or rolling the same assets directly into a new IRA or plan!

Please note: With rollovers from an eligible retirement plan, employees can either roll the same property into the IRA or sell the property and invest the proceeds into the IRA. This cannot be done in an IRA-to-IRA rollover. However, for the transaction to be tax-free, you CANNOT keep the stock and contribute additional cash in place of the stock (even though it may be the same dollar value). Note: For indirect rollovers to be tax-free, additional restrictions and limitations may apply. You should consult with your tax advisor regarding your individual situation.