Since dealing with IRA accounts and taxes can be confusing, many people end up facing unnecessary IRA rollover tax penalties on their rollovers. There are many different kinds of retirement accounts that rollover money between them can feel like a daunting and difficult task. However, there are some simple things you can do to protect your retirement investments and to make sure that you don’t end up paying IRA rollover taxes that you don’t need to. One of the first things that you need to do is to decide on the kind of IRA rollover account that you want to roll your money into.

If you’re moving from a traditional or Simple IRA that was provided by your employer because you’re setting out to work for yourself or own your own business, you’ll most likely want to consider an SEP IRA.  SEP IRAs have higher annual contribution limits than other types of retirement accounts and your contributions can be deducted from your annual income taxes.

On the other hand, if you’re going to start a job that doesn’t offer an IRA plan, then you can open a traditional IRA or a Roth IRA on your own.  Pre-tax contributions from your existing 401k account or traditional IRA can be rolled into a new traditional IRA with no problem, but the situation with Roth IRAs is a bit different.  The money that’s deposited into a Roth IRA has already been taxed, so there’s no separate Roth IRA tax deduction.  The good news, though, is that with a Roth account, the money won’t be taxed later on when it’s withdrawn.

Once you’ve decided on the kind of account you want to move your funds to, you’ll need to decide how you’re going to complete the rollover.  There are two different ways that the money can be moved from your existing account into the new one.  The first type is known as a direct rollover, and it simply means that the money is moved between IRA accounts directly, and therefore suffers so problems with IRA rollover taxes.

The second is known as an indirect rollover and, in this case, you’re personally issued a check for just 80% of the total.  The remaining 20% is held out for IRA taxes in case you don’t transfer the funds into a new account within 60 days.  This is typically where most of the unnecessary IRA rollover tax penalties come into play.  For example, if you take longer than 60 days to deposit the money into an account, you will have forfeited the 20% to taxes.  In addition, unless that money goes into a Roth IRA, you’ll have to pay taxes again on the income when it’s withdrawn later in retirement.  This is a common IRA rollover tax mistake that leads to double taxation.

The best thing that you can do to help avoid unnecessary IRA taxes is to go over all of the options with your financial advisor.  This way, you can decide which rollover option will yield you the best results, without any unnecessary IRA rollover taxes.