August 19, 2026 • Ed Slott
[Editor’s Note: This is an excerpt from the June 2026 issue of Ed Slott’s IRA Advisor newsletter.]
When a mistake is made with IRA or retirement plan assets, there is usually a mechanism to correct the error. For example, if too much money is contributed to an IRA, a person can follow the rules to remove the excess without penalty (assuming the funds are withdrawn on or before October 15 of the following year). Or, if an IRA owner fails to take his required minimum distribution (RMD), there are procedures in place whereby the person can take the missed RMD and formally request a waiver of the missed RMD penalty from the IRS.
On the other hand, some mistakes have no corrective steps. Once the deed is done, there is no going back. Such missteps can result in substantial tax bills, unintended penalties, and ultimately the loss of hard-earned retirement savings.
Here are seven fatal errors where the account owner has no way to unwind what was done and instead must face the consequences.
1. Non-Spouse Beneficiary Rollovers
Only spouse beneficiaries can move inherited IRA or plan dollars via 60-day rollover. Non-spouse beneficiaries must move inherited funds via direct transfer between custodians. If pre-tax inherited IRA or plan funds are distributed and payable to a non-spouse beneficiary, those dollars are taxable. If the recipient tries to roll over the funds, the doors at all potential receiving institutions will be closed. There is no transaction a non-spouse beneficiary can do to reverse what might be a catastrophe. Any taxes due will be due. As such, it is imperative that non-spouse beneficiaries proceed with caution. Understanding the rollover restrictions when moving inherited plan or IRA funds is essential. Failure to do so could result in a significant tax bill and eliminate any ability to spread taxable distributions over a multi-year period.
Example 1: Mike, age 45, inherited a $400,000 IRA from his father, who died at age 70. Mike is a non-eligible designated beneficiary (NEDB) and is bound by the 10-year payout rule. Mike’s plan is to withdraw about $40,000 per year so as to spread the tax bill over the entire 10-year period. But first, Mike wants to move the inherited IRA to another custodian.
Mike takes a full distribution of the $400,000—payable to him—with the intent to do a 60-day rollover. This is a fatal error. As a non-spouse beneficiary, Mike can only move inherited IRA funds via direct transfer. The distribution cannot be put back. The 10-year payout period is lost, and all taxes on the $400,000 lump-sum distribution are immediately due.
2. Irreversible Spousal Rollovers
Spouse beneficiaries are the only type of beneficiary who can move inherited dollars into their own account. This is called a “spousal rollover.” However, once this common transaction is completed, it cannot be unwound.
If a surviving spouse under age 59½ does a spousal rollover, the inherited assets will follow all the normal rules applicable to a person’s own IRA—including the early distribution rules. If a young surviving spouse then takes a withdrawal from the account, a 10% early distribution penalty will apply (unless an exception applies). If a young spouse knows she will need access to the funds, a better choice is to delay the spousal rollover and maintain an inherited IRA. Any withdrawals from the inherited IRA will be penalty-free, and she can always do a spousal rollover later, after she turns age 59½.
Example 2: Maria, age 55, lost her husband after a long illness. Maria is the beneficiary of her husband’s $1,000,000 IRA, and she needs access to those funds to cover her daily living expenses. Without speaking to a knowledgeable advisor, she did a spousal rollover and moved all $1,000,000 into her own IRA. This was a fatal error.
The spousal rollover cannot be undone. Any distributions Maria takes from the IRA will likely face a 10% early withdrawal penalty. A better strategy would have been to keep all (or a portion) of the $1 million as an inherited IRA. Then, Maria would have full, penalty-free access to the funds in the inherited account. At age 59½, Maria could have done a spousal rollover to consolidate the inherited IRA into her own, at which point she could continue to take withdrawals without penalty.
In a real-life case (Charlotte Gee et vir. v. Commissioner; 127 T.C. No. 1; No. 8755-05, July 24, 2006), Mrs. Gee inherited $2,646,798 from her deceased spouse and completed a spousal rollover. While still under age 59½, she withdrew $977,888 as a taxable distribution. Mrs. Gee incorrectly claimed the 10% early withdrawal penalty did not apply because she was a beneficiary. The mistake cost her $97,789.
3. Exceeding The One-Rollover-Per-Year Rule
An IRA owner is allowed to roll over one distribution received within any 12-month period (for IRA-to-IRA or Roth-IRA-to-Roth-IRA rollovers). If more than one 60-day rollover is done, that mistake cannot be excused. The illegal rollover is deemed to be an excess contribution to the receiving IRA and must be removed. Further, any pre-tax dollars included in the failed rollover will be taxable (and potentially subject to a 10% penalty if under age 59½).
Note that the one-rollover-per-year rule also applies to spousal rollovers if done via 60-day rollover. While the IRS has never issued any official guidance specifically stating that this rule applies to spousal 60-day rollovers, in PLR 201707001 the IRS takes the position that it does. To avoid any complications from the one-rollover-per-year rule, a better plan is to do direct transfers.
There is no limit on the number of direct transfers a person can do.
4. Violating The ‘Same Property’ Rollover Rule
The same property withdrawn from an IRA is the only property eligible to be rolled over. If an IRA owner withdraws cash, then only cash can be rolled over. If a specific stock is withdrawn, then only that stock can be rolled over. If a different property is rolled over, the “illegal” assets in the receiving IRA must be withdrawn as an excess, and the original distribution will be subject to tax and (potentially) an early withdrawal penalty. (The only exception to this rule is for a distribution from an employer plan where the asset can be sold and the cash from the sale can be rolled over to an IRA.)
Example 3: Meg owns 1,000 shares of ABC stock in her IRA, valued at $150,000. Meg requests the shares be distributed in-kind from her IRA to her non-qualified brokerage account with the intent of moving them into an IRA with another custodian within 60 days.
After the distribution, while the shares are still in her “regular” brokerage account, ABC stock starts to decline. Meg panics and sells all the shares. Meg then rolls over the remaining cash proceeds to another IRA, plus a few extra dollars from savings to make the rollover “whole.” This is a violation of the same property rollover rule. Meg withdrew stock and rolled over cash. The $150,000 is now a taxable distribution and an excess contribution in the receiving IRA.
5. Roth Conversion Regrets
While recharacterization of an IRA contribution is still allowed, recharacterization of Roth conversions is not permitted. A Roth conversion done by mistake by the account owner or one that is not wanted “after sleeping on it” cannot be unwound. Once the transaction is completed, the additional taxable income from the conversion in that year cannot be avoided.
Roth conversions can also result in “stealth taxes.” For example, Medicare's income-related monthly adjustment amount (IRMAA) surcharges could be impacted by a Roth conversion done two years earlier. Financial aid could be lost or impaired, taxes on Social Security could increase, and certain other tax deductions could also be lost.
6. Lost NUA Opportunity After An IRA Rollover
The net unrealized appreciation (NUA) tax strategy enables a person to pay long term capital gains tax on the appreciation of company stock purchased within a company retirement plan. But if the shares are rolled over to an IRA, the NUA opportunity is forever lost. A fatal error. The rollover cannot be reversed (see PLR 200442032), and any potential NUA tax savings disappear. With NUA, it is imperative to look before you leap.
7. Modifying A 72(t) Plan
A 72(t) “substantially equal periodic payment” distribution program allows a person under age 59½ to access retirement dollars with no 10% early withdrawal penalty. The program must continue for at least five years or until age 59½, whichever period is longer. But this is a slippery slope. A lot can go wrong in five or more years. Any modification to a 72(t) distribution schedule, such as randomly changing the annual distribution amount or adding new dollars to the account via contribution or rollover, will disqualify the 72(t) program. The 10% early distribution penalty will then apply retroactively to all distributions taken prior to age 59½. There is no correctional transaction the account owner can make to fix the error on his own.
Example 4: Brad, age 58, initiated a 72(t) distribution program from his IRA eight years ago when he was 50 years old. Brad must continue the chosen withdrawal plan until he is age 59½. Brad has been sticking to the plan for eight years, withdrawing $10,000 per year. Brad’s IRA has grown substantially and he decides to withdraw $50,000 in year 9 instead of the usual $10,000. Brad figures the IRS will not care because it is getting more tax dollars faster from him. Brad is incorrect. The $50,000 withdrawal is a modification and will result in a 10% penalty on all distributions taken since Brad started his 72(t) program.
… This is not the end of the fatal error list. For example, to avoid taxes and penalties, it is vital to understand how to properly divide IRA and retirement plan assets after divorce. Also, be sure to recognize that missing the deadline to establish inherited IRAs after the death of the owner could saddle the beneficiaries with a less desirable payout structure. Additionally, engaging in a prohibited transaction with IRA assets will generally disqualify the IRA, causing all assets to become a taxable deemed distribution…and there is no fix.
Be careful with all IRA and retirement plan transactions. Some roads are a one-way street, and there is no going back. If the wrong path is taken, there could be no recourse to correct whatever subsequent disaster follows.
Ed Slott, CPA, is a recognized retirement tax expert and author of many retirement-focused books.
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