These Are the Three Biggest Retirement Plan Rollover Mistakes, According to an Expert. Here's How to Avoid Penalties.

PHOENIX — If you're saving for retirement using a 401(k) or an individual retirement account (IRA), it's crucial to be aware of potential tax and penalty pitfalls when transferring money between accounts.

Many investors make costly rollover mistakes without seeking professional guidance, warns Denise Appleby, the CEO of Appleby Retirement Consulting.

"We need to come together and protect these assets," she emphasized while speaking at the annual conference of the Financial Planning Association on Thursday.

A rollover occurs when you withdraw money from one plan and deposit it into another, distinguishing it from a transfer, which merely moves accounts between institutions.

Appleby cautioned against the following three common rollover mistakes:

1. Violating the Once-a-Year IRA Rollover Rule

"The most significant mistake is breaking the once-a-year IRA to IRA rollover rule," Appleby told CNBC. "This often occurs due to impatience."

Generally, you are restricted from making more than one IRA-to-IRA rollover within a 12-month period, she explained. If you exceed this limit, you must include the rollover amount in your gross income and may face a 10% early withdrawal penalty if you're under age 59½.

Additionally, the IRS treats the excess rollover as an overcontribution, subjecting it to a 6% annual penalty for each year the money remains in the new IRA.

2. Missing the 60-Day Rollover Deadline

Another common blunder is missing the 60-day deadline for retirement plan rollovers, according to Appleby.

You have precisely 60 days to complete a rollover for a retirement plan or IRA, and this countdown begins when you receive the proceeds, she clarified.

"People often have good intentions, but life can get in the way," she noted. Generally, failing to meet the 60-day deadline results in the money being treated as a taxable distribution, unless you qualify for an IRS waiver.

3. Losing Eligibility for the 10% Penalty Exception

Most retirement plan distributions are taxable and can trigger a 10% early withdrawal penalty, unless you qualify for certain exceptions.

However, these exceptions are specific to each type of account and may not apply when transferring funds from a 401(k) to an IRA, or vice versa. "This occurs quite frequently," Appleby observed.

For instance, there's a 10% penalty exception of up to $10,000 for first-time homebuyers with IRAs, but this exception does not apply to 401(k) plans. Similarly, there's no exception for leaving your job at age 55 or older, known as "separation from service," when transferring money from an IRA. This exception typically applies to employer plans like 401(k)s.

That's why it's essential to review the eligibility criteria before rolling over funds to ensure you don't lose access to certain exceptions, she advised.