Most financial mistakes can be corrected. You can rebalance a portfolio, adjust a savings rate, or rework a budget. But there is a category of IRA and 401(k) mistakes that are completely irreversible — and the consequences can follow you for the rest of your retirement. Higher taxes, Medicare premium surcharges, and penalties that no advisor, no matter how experienced, can undo.
At Cardinal Advisors, we are members of Ed Slott’s Elite IRA Advisor Group. We attend two meetings a year specifically to stay current on IRA rules and the mistakes that trip up retirees every day. What follows are three of the most common — and most costly — irreversible IRA mistakes we see, along with real stories from our practice and what you should do instead.
Mistake #1: Non-Spouse Beneficiaries Taking Possession of Inherited IRA Money
When a parent, relative, or anyone other than a spouse leaves you an IRA, you are considered a non-spouse beneficiary. The rules around inherited IRAs are strict, and the most damaging mistake a non-spouse beneficiary can make is simple — taking possession of the money.
It happens more often than you might think. A parent passes away. The adult child, grieving and unfamiliar with the rules, receives a claim form from the custodian. They fill it out, request the funds, and a check arrives in the mail. Then they call us and ask what to do with it. At that point, there is very little we can do. Once a non-spouse beneficiary takes physical possession of inherited IRA money, it cannot be rolled over. There is no 60-day window. There is no workaround. The entire amount is considered a taxable distribution, and the tax bill arrives whether you are ready for it or not.
The correct approach is to set up an inherited IRA — sometimes called a beneficiary IRA — and have the money transferred directly from the original custodian to the new account without ever passing through your hands. This is called a trustee-to-trustee transfer, and it preserves the tax-deferred status of the funds. From there, distributions can be taken over time according to the applicable rules, rather than all at once in a single taxable year.
If you have recently inherited an IRA and have not yet taken any action, pause before you do anything. The single most important step is to consult with someone who knows these rules before you touch the money.
Mistake #2: Surviving Spouses Rolling Inherited IRA Money Into Their Own IRA Without Considering All Options
When a spouse passes away, the surviving spouse has more options than a non-spouse beneficiary — but more options also means more opportunities to make the wrong choice. And once that choice is made, it cannot be undone.
A surviving spouse can leave the inherited IRA in the deceased spouse’s name and continue managing it as an inherited IRA. Alternatively, they can roll the funds into their own IRA. Both paths have legitimate advantages depending on the surviving spouse’s age, income needs, and financial situation. The problem arises when a surviving spouse moves the money into their own name without fully understanding the implications.
One of the most significant consequences involves age. If you are under 59½ and you roll inherited IRA money into your own IRA, any withdrawals you take will be subject to a 10% early withdrawal penalty. If you had left the money in an inherited IRA, that penalty would not apply. That distinction alone can mean thousands of dollars in unnecessary costs.
This is why we strongly encourage surviving spouses to sit down with a qualified advisor before taking any action on an inherited IRA. The emotional weight of losing a spouse can make financial decisions feel urgent, but in most cases there is no immediate deadline. Taking a few weeks to grieve and then reviewing all available options with a professional is almost always the better path.
Once inherited IRA money has been rolled into your own name, there is no reversing that decision. The rules that apply to your IRA are now the rules you live with.
Mistake #3: Exceeding the One Rollover Per Year Rule
The IRS allows only one 60-day rollover per 12-month period. This rule is widely misunderstood — and violating it is one of the most common irreversible IRA mistakes we see.
First, it is important to understand what a 60-day rollover actually is. A 60-day rollover occurs when you take possession of IRA money — meaning the funds are paid directly to you — with the intent of depositing that money into another IRA within 60 days. This is different from a trustee-to-trustee transfer, in which the money moves directly from one financial institution to another without ever passing through your hands. Trustee-to-trustee transfers can be done as many times as you like in a given year. The one-per-year rule applies only to 60-day rollovers where you physically receive the funds.
The 12-month period is also frequently misunderstood. This is not a calendar year rule. If you complete a 60-day rollover on June 1st of one year, you cannot do another one until June 2nd of the following year. It is a rolling 12-month window, not a reset that occurs every January.
The consequences of violating this rule are significant. The second rollover is considered an excess contribution, which means it cannot be deposited into an IRA. If the money has already been deposited, it must be withdrawn, and taxes and penalties apply. What was meant to be a simple account transfer becomes a taxable event that cannot be reversed.
We have seen this play out in a number of ways in our practice. One client wanted to use their IRA funds to purchase a multi-year guaranteed annuity — essentially a fixed interest product similar to a CD. They pulled the money out for the first purchase and then wanted to do the same for a second one. We had to stop them. They had already used their one 60-day rollover for the year. The second purchase had to be structured as a trustee-to-trustee transfer, or the deposit would have been treated as an excess contribution with all the tax consequences that follow.
The most striking example, however, involves a client who took $200,000 out of their IRA intending to roll it over into a new account. The custodian, treating it as a distribution, withheld approximately $55,000 for taxes. The client received $145,000. They now had 60 days to deposit $200,000 — the full original amount — into the new account, not just the $145,000 they had received. They had to come up with the $55,000 shortfall from other funds, coordinate the transaction, and complete everything within the 60-day window. The stress and risk involved were entirely avoidable.
A Cautionary Story: The Couple Who Used Their IRA to Buy a New Home
Perhaps the most illustrative example of what can go wrong with a 60-day rollover involves a couple who came to us after the damage had already been done. They were retiring and planning to relocate — a very common scenario. They wanted to buy a new home before selling their current one, but they were unwilling to take on a mortgage. Their solution was to withdraw the money from their IRA, pay cash for the new home, sell their existing home, and then use the proceeds to replenish the IRA within 60 days.
On the surface, the logic seems reasonable. In practice, it was a disaster waiting to happen. Anyone who has been through the process of buying and selling a home knows how unpredictable the timeline can be. Sixty days is an extremely tight window to complete two real estate transactions, coordinate the proceeds, and make a qualifying IRA deposit. They could not do it in time. The entire amount they had withdrawn was treated as a taxable distribution. The tax bill that followed was substantial — far larger than the interest they would have paid on a short-term mortgage. And it was permanent. There was no fixing it.
The irony is that the solution was simple. Take out a short-term mortgage to buy the new home, sell the existing home, and pay off the loan. The interest cost would have been modest and temporary. The tax cost was neither.
The Bigger Picture: Planning Before You Move Money
All three of these mistakes share a common thread. They happen when people move retirement account money without fully understanding the rules — and often without consulting a professional first. The rules around IRAs are genuinely complicated. They are not intuitive, they are not well publicized, and the consequences of getting them wrong are not proportionate to the simplicity of the mistake.
We also want to be clear that this is not a complete list. There are other IRA mistakes that are just as irreversible and just as costly. The three covered here are among the most common, but they are not the only ones.
Our strong advice is this: any time you are moving IRA or 401(k) money — for any reason — pause and get professional guidance before you act. Not after. The time to call an advisor is before the money moves, not after the 1099 arrives in the mail.
At Cardinal Advisors, we are licensed in all 50 states and the District of Columbia and we work with clients across the country by phone and Zoom. If you have questions about an IRA, an inherited account, or a rollover you are considering, we are here to help.
