Money Lessons > Retirement > How to Avoid Rollover Mistakes When Moving Your Retirement Savings

How to Avoid Rollover Mistakes When Moving Your Retirement Savings

A 401k rollover is a way to take your previous employer’s retirement plan (such as a 401k) and transfer it to an individual retirement account (IRA). This can help you save and invest for retirement with more control and flexibility over your money.

However, there are some tax implications and rules you need to be aware of when rolling over your 401k. One of the most common mistakes that can cause problems is exceeding the annual IRA contribution limit.

What is the IRA contribution limit for 2024?

The IRA contribution limit for 2024 is $7,000 for those under age 50, and $8,000 for those age 50 or older. This is an increase from the 2023 limit of $6,500 for both groups.

The IRA contribution limit is the combined maximum you can contribute annually across all personal IRAs. This means if you have a traditional IRA and a Roth IRA, you cannot contribute more than this limit across both accounts in a year.

How does the IRA contribution limit affect your 401k rollover?

If you receive a distribution from your 401k and decide to roll it over to an IRA, you generally don’t pay tax on it until you withdraw it from the new plan. By rolling over, you’re saving for your future and your money continues to grow tax-deferred.

However, if you receive a distribution that exceeds your IRA contribution limit for the year, you may face some consequences. For example:

  • If you’re under age 50, you may not be able to deduct your traditional IRA contributions from your taxable income for the year if your income and/or your spouse’s income is above a certain threshold.
  • If you’re age 50 or older, you may not be able to catch up on your IRA contribution if you missed the deadline or made a mistake.

To avoid these issues, it’s important to plan ahead and communicate with your plan administrator and financial institution before rolling over your 401k. You should also keep track of your income and expenses throughout the year and report them accurately on your tax return.

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