Pitfall 3: Rolling Assets From Employer-Sponsored Plans

From AIG Funds

20% of your money is generally withheld!

Rollover mistakes - 20% Withholding

When you take out money from your employer-sponsored plan, your company generally has to withhold 20% of the taxable amount—even if you are planning to roll the assets into another IRA or plan within 60 days. Depending on your tax bracket, you may also pay additional income tax on top of this 20%, along with a 10% tax penalty on any amount not rolled over, if you are under age 59½!

To avoid these taxes, you have the option to replace the 20% withheld with outside money. If you then roll 100% of the assets into a new IRA or plan within 60 days, your entire indirect rollover will be tax-free.

A tax refund or credit can be requested on the annual tax return. BUT this process is inconvenient, time-consuming and only works if you can come up with money from out of your own pocket. The better option is to simply avoid the tax withholding requirement by electing a transfer or direct rollover!


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.