Most IRA mistakes forgive you. Put in too much and you can pull the excess and its earnings back out before Oct. 15 of the following year with no 6% penalty. Miss a required minimum distribution and you take it late, file Form 5329 and ask the IRS to waive the hit. Then there are the four that don’t forgive anyone. Leonard Sloane’s Journal Report piece catalogs them, and a Wexford, Pa., planner named Bradley Tiche gives the diagnosis: “These are fatal errors,” made by people who weren’t sure what to do. Every one of them lives in the rollover.
The first is the one we see coming. When a widow or widower inherits an IRA, the law allows a detour: cash it out, put it into your own IRA inside 60 days, owe nothing. A child or a sibling who inherits the same account gets no detour. For a nonspouse heir the money has to travel custodian to custodian in a direct transfer; if the check lands in the heir’s hands instead, the taxable portion counts as that year’s income, and the plan to spread withdrawals over 10 years is gone. The fine print is almost funny: the sending custodian can mail a check to you, as long as it’s payable to the receiving custodian and not to you.
Second, the once-a-year rule. Indirect IRA-to-IRA rollovers — the kind where the money passes through you — are capped at one in any rolling 12 months. Two traps hide in that sentence: the clock isn’t the calendar year, and the cap generally covers every traditional and Roth IRA you own, not each account separately. Break it and the excess has to come out, the pretax dollars are taxed, and anyone under 59½ may owe the 10% early-distribution tax on top. Third, a 72(t) plan — the substantially-equal-payments schedule that lets you tap an IRA before 59½ — must run at least five years or until 59½, whichever is longer, and any change, even adding money to the account, can trigger a 10% penalty retroactive to every payment taken before 59½. Sloane’s fix: split the IRA so only one piece runs the plan.
Same shares in, same shares out
Fourth, the “same property” rule. Take 200 shares of one company out of an IRA for an indirect rollover and the only thing that can go back in within 60 days is those 200 shares. Redeposit cash, or a different company’s shares, and the IRS treats it as an excess contribution that has to come out — and the distribution itself may be taxed and penalized. Don’t sell or swap in transit — or skip the transit and transfer directly.
Our read
This is Retirement (M10) with Tax and Estate written all over it, and the four mistakes share one cure: never take possession of retirement money that’s on its way somewhere else. Direct, custodian-to-custodian transfers aren’t subject to the once-per-12-months limit, and because the money never passes through you, the 60-day clock and the same-property test never start; for a nonspouse heir the direct transfer is the only route there is. These moves cluster in the fourth quarter — job changes, account consolidations, inheritances landing months after a death — and the people making the mistakes aren’t careless; as Tiche says, they’re unsure. The IRS doesn’t grade on intent.
Two habits, then. Before any IRA or 401(k) moves, ask the receiving institution to pull it, and if a check is involved, read the payee line twice. And if you’re the one with heirs, write down which accounts are IRAs and teach your beneficiaries two words — “direct transfer” — a short conversation that keeps an inherited account from becoming one year’s taxable income. You don’t fix the gutter while the storm’s overhead; you check it in October, while the sky is still dry.