Do you ever feel like a hamster on a wheel, constantly moving but not getting anywhere? At its busiest, life can feel that way. You triage the things you need to accomplish, taking care of tasks that seem most critical first. However, when your days are full of things that “must” get done, it’s easy to allow things to fall through the cracks. Here, we’re looking at two common mistakes associated with traditional IRAs and how to avoid them — no matter how busy your life gets.

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1. Losing money as you move your money from a 401(k) to an IRA

The great thing about contributing to a retirement plan is that the money belongs to you, no matter where you go. Even if your employer contributed a portion of your retirement savings, it’s all yours as long as you’re vested.

Let’s say you’ve been working at the Acme Brick Company for years, but you’re leaving to work for another company or start your own small business. You have three primary options regarding your 401(k):

• Roll the funds over to your new employer’s 401(k) (or a Solo 401(k) if you’re going out on your own)
• If the company allows it, leave the money in your former employer’s 401(k)
• Roll the money over into an IRA

The issue

If you decide to roll the funds from your 401(k) into an IRA, it can be accomplished in two ways. The first and most direct way is to ask your plan administrator to issue a check directly payable to the new account. No muss, no fuss, and no taxes withheld from the amount transferred.

The other method is to have a check made out to you. You then have 60 days to deposit it into another qualified retirement plan, like an IRA. While it may sound good to have 60 solid days to decide where you want your money to go, the IRS explains: “Any taxable distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll the distribution over later.”

That 20% is a down payment on any taxes you’ll owe. Say you have $100,000 in a 401(k). Your plan administrator is mandated to deduct $20,000 (20%) for taxes. Depending on your specific tax situation, that $20,000 may not be enough to cover taxes fully. If so, you’ll need to come up with the rest at tax time. However, it’s also possible that the $20,000 will be more than enough, and you’ll enjoy a tax refund.

If life gets busy and you forget to roll over your 401(k) proceeds within 60 days, the entire amount will be treated as a taxable distribution, meaning taxes are due on the money that year. A final issue involves your age. If you’re under age 59 1/2 when the funds are distributed, any portion not rolled over may be subject to an additional tax of 10%.

The fix

Unless you have a pressing reason to have the check sent to you, avoid the hassle of dealing with taxes by having it sent directly to the IRA account you’re rolling it into. And if you’re under 59 1/2, think long and hard about whether you want to withdraw money from an account reserved for retirement. If you must withdraw funds from your 401(k), be clear on how much you’ll pay in penalties. Finally, don’t make a final decision until checking to see if your reason for taking the funds is on the IRS’ penalty-free exemptions list (more on the exemptions list in a moment).

2. Tapping into your IRA before retirement

The issue

Whether you’re newly divorced and need cash or feel weighed down by high-interest debt and want nothing more than to be debt-free, it can be tempting to dip into your retirement savings. The issue is the cost of withdrawing that money from your account. In addition to a 10% penalty that applies if you’re under 59 1/2, taxes are typically due in the year the money leaves your account.

The fix

Even the IRS understands that circumstances sometimes make withdrawing funds from an IRA necessary. That’s why it provides exceptions to the 10% penalty rule. You must still pay taxes on any funds withdrawn, but you can save by not paying the penalty. The IRS provides this broad outline of exceptions to its 10% penalty tax on early IRA withdrawals:

• Birth or adoption: A distribution of up to $5,000 per child for qualified birth or adoption expenses.
• Death: Following the death of the IRA owner, the funds are not subject to the early distribution tax.
• Disability: Total and permanent disability of the IRA owner.
• Disaster recovery distribution: Up to $22,000 to qualified individuals who sustain economic loss due to a federally declared disaster.
• Domestic abuse victim: Up to the lesser of $10,000 or 50% of the IRA account balance.
• Education: Withdrawals to cover qualified higher education expenses.
• Emergency personal expense: One distribution per calendar year for individual or family emergency expenses, up to $1,000.
• Homebuyers: Qualified first-time homebuyers, up to $10,000.
• Levy: Due to an IRS levy on the plan.
• Medical: Amount of unreimbursed medical expenses.
• Medical insurance: Health insurance paid while unemployed.
• Military: Certain distributions to qualified military reservists called to active duty.

Given the value of allowing your money to grow in a pre-tax retirement account, you can ideally avoid early withdrawals. However, if you must tap the account, these exceptions can make it less expensive.

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