Economic stimulus legislation enacted in 2020 offers a new opportunity for penalty-free IRA withdrawals—but taking advantage could be costly. And a 2019 law substantially altered IRA-withdrawal rules—but not for everyone, which seems certain to cause confusion.

A single mistake in withdrawing money can derail decades of contributions to an IRA. Taking money out at the wrong time or in the wrong way can trigger tax bills and penalties and also short-circuit future tax-deferred or tax-free investment growth. But IRA-withdrawal rules are complex, and recent changes are likely to complicate matters. Even if you thought you understood the new rules, it’s worth reviewing the potential traps. Seven costly IRA withdrawal mistakes to avoid…

Mistake: Taking advantage of penalty-free IRA withdrawals. The Coronavirus Aid, Relief and Economic Security (CARES) Act included a provision allowing people to withdraw up to $100,000 from IRAs without the 10% early-withdrawal penalty that ordinarily applies when money is removed before age 59½. But this rule merely lets you raid your own retirement savings before retirement age. Doing so could cost you years of tax-deferred investment growth.

This isn’t the first time the government has created special opportunities to withdraw money early from IRAs without penalty—another recent rule allows up to $5,000 in penalty-free withdrawals when the account holder has or adopts a child, for example. Ignore all of these early-withdrawal opportunities unless you are desperate for cash and have no other options. Tax-advantaged retirement accounts are the very best long-term savings vehicles available and should be the last assets preretirees tap when they need cash.

Mistake: Assuming the recent change to required distribution rules applies to you. Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the age at which people must make “required minimum distributions” (RMDs) from retirement accounts has been pushed back from 70½ to 72. What some people don’t understand is that this age-72 start year applies to you only if you were born on or after July 1, 1949. If you were born before that day, you still have to begin taking RMDs in the year you turn 70½. Adding to the confusion, no one was required to take RMDs for 2020 because of the pandemic. The penalties for misunderstanding this and missing a withdrawal deadline are steep—a staggering 50% of the amount you were supposed to withdraw.

Mistake: Assuming that the new rules for withdrawing money from inherited IRAs apply to your inheritance. Prior to the SECURE Act, heirs who inherited IRAs from anyone other than a spouse had the option of removing money from those IRAs slowly, by making annual withdrawals based on their life expectancy. With a few exceptions, the new rules do not require heirs to take annual withdrawals but do require that all of the money be withdrawn from the inherited IRA by the end of the 10th year following the year in which the original account holder died.

On the surface, the changes should help reduce withdrawal mistakes— there’s no need to calculate life expectancies or annual withdrawal amounts. But in practice, this is likely to make withdrawal mistakes more common. For one, some heirs will no doubt fail to understand that the new rules don’t apply to all inherited IRAs—if you inherited an IRA because of a death that occurred in 2019 or earlier, the old rules still apply. And when the 10-year rule does apply, heirs will have to remember to take the money out by a deadline that’s a decade down the road. There are sure to be heirs who lose track of this crucial-but-distant deadline and incur massive penalties as a result. You could add a reminder to yourself in a calendar app or instruct a financial adviser to remind you, but that approach could fail if you’re not using the same app or advisor in a decade. Another option is to use multiple reminders, including calendar apps, advisors and asking family members to use their calendar apps, to remind you to do so as well.

Mistake: Failing to follow through after arranging annual early withdrawals from an IRA. The tax code allows penalty-free withdrawals before age 59½ from an IRA if those withdrawals are made as part of a series of “substantially equal periodic payments.” But the rules governing this exception are extremely complex, and if you make a single mistake, the IRS is very likely to spot it and impose harsh penalties. How harsh? To qualify for these penaltyfree early withdrawals, you must make a series of withdrawals for at least five years or every year until you turn 59½, whichever is longer—and if you make a mistake with the size or timing of any of these withdrawals, the IRS will impose a retroactive 10% penalty on all the money you have removed from the IRA as part of this series. The rules and calculations required are tremendously challenging, so this is not something to attempt without the assistance of a tax pro.

Mistake: Taking a so-called “60- day IRA loan.” There’s actually no such thing as a loan from an IRA, but when you roll over money from one IRA to another, you have 60 days to redeposit it into the new account…so it is possible to give yourself short-term access to your IRA assets without penalty. Don’t be tempted—people who attempt this often make missteps that devastate their retirement savings. The most obvious error is failing to get the money into the new IRA before the 60-day window closes. But that’s not the only way “IRA loans” can go horribly wrong. Some account holders misunderstand the rule that limits them to one IRA rollover per year—it’s one per taxpayer, not one per IRA. Others fail to understand that the restriction is calculated on a rolling 12-month period, not a calendar year. In other words, you can’t do this once in December, then do it again the following January. If you don’t get the money into the new account in 60 days or misunderstand the rules and attempt a rollover that you were not allowed, the entire amount transferred will be treated as a withdrawal, potentially resulting in taxes, early-withdrawal penalties and/or the loss of an opportunity for additional tax-deferred or tax-free growth.

The best way to avoid getting rollover rules wrong is to opt for direct IRAto- IRA rollovers rather than ever taking IRA money you intend to rollover into your possession.

Helpful: The one-per-year rollover rules above apply only to IRA-to-IRA or Roth-to-Roth rollovers, not to 401(k)- to-IRA rollovers or to IRA-to-Roth IRA conversions.

Mistake: Rushing to roll over an IRA inherited from a spouse. Unlike other beneficiaries, spouses are allowed to roll over inherited IRAs to their own IRAs. But they also are allowed to simply keep the inherited IRA—without the annual withdrawal requirements or 10-year withdrawal deadline faced by other IRA heirs. For widows and widowers who have not yet reached age 59½, initially keeping the money in the deceased spouse’s IRA can be the smart move. If the surviving spouse must tap this money before 59½, he/she can do so without penalty—early-withdrawal penalties do not apply to inherited IRAs, but they do when a spouse rolls the IRA into his own IRA. When these widows and widowers reach 59½—or determine that they won’t have to tap the account before 59½—they then can roll the money into IRAs in their own names.

Mistake: Assuming an inherited Roth IRA doesn’t have RMDs. Roth IRAs usually do not have RMDs, but there’s an exception—if a Roth is inherited by anyone other than the spouse, RMD rules apply just as they do with inherited traditional IRAs. That means if the original owner of the Roth died in or after 2020, the new 10-year deadline applies…or if the death occurred before 2020, the old annual withdrawal rules apply

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