One of the primary advantages of having an IRA is that you get to defer taxes on your money until a later time, when you anticipate having to pay less in rollover taxes. As you might expect, you lose that advantage if you have to pay IRA rollover taxes when you move your money between retirement accounts.

But what are the circumstances under which you have to pay IRA rollover taxes and how can you protect yourself from any unnecessary penalties?

First, you should know that there is no IRA rollover tax that you’re required to pay simply because you choose to rollover your money. There may be other fees involved with the transaction, but these shouldn’t be taxes owed to the IRA, provided you don’t take a distribution or withdrawal. So long as your money is directly transferred from one qualified IRA to another, you shouldn’t owe any IRA rollover taxes.

However, you should also understand that the rollover of money from one IRA to another is what the IRS designates as a reportable event.  This means that when the rollover takes place, the IRS gets notified.  Just because an event is reportable, though, does not mean that it’s taxable.

On the other hand, you should expect to have to pay IRA rollover taxes if – for any reason – the money from your IRA comes into your possession.  There are a couple of different ways this could happen.

First, you might ask for an indirect rollover, where your funds are paid to you and you have the burden of then reinvesting them into a new IRA.  Not only will you run the risk of having to pay IRA taxes in this situation, but you’ll also have a significant percentage – typically 20% – of your money withheld automatically as well.  You won’t get this money back, even if you do meet the IRS’s 60 day window for reinvesting your funds into a new IRA.

The other way this could happen is that you request a rollover of your money into an account which cannot, for one reason or another, accept the funds.  Under these circumstances, the account manager has no choice but to close your account and disburse the funds to you.  Whenever there is a distribution or withdrawal from your account, you may incur an IRA tax burden.  You might be able to minimize this burden by immediately reinvesting the money, but the key word is “minimize,” not “avoid.”

The best way to avoid IRA rollover taxes is to either leave your money where it is or, if a rollover is desirable, to make sure the rollover is managed in such a way that the money is moved directly from one IRA to another (this is known as a direct rollover).

As you might expect, any time you have questions about IRA taxes or your investments, it’s a good idea to contact a financial professional or a certified public accountant – especially when large sums of money are involved. When it comes to IRA rollover taxes, you’ll find that it’s always easier to get advice at the beginning than to try and correct a difficult or complex situation after the fact.