401k Rollover Rules and Restrictions

If you have a 401k, the rollover rules are important because of hefty tax implications. When you change jobs, your 401k plan can rollover to the new account and does not have to be complicated.

401k Rollovers

As far as the IRS is concerned, a rollover happens when money, stocks, and other funds in a 401k are withdrawn and transferred to another account within 60 days. For those who are not yet 59 1/2 years old, all contributions made to the plan are eligible for rollover to the new plan, without a tax consequence.

Direct Rollovers

This is the best way to transfer money from one account to another without having to worry about the tax complications. Your new employers account administrator will be able to provide paperwork that will help facilitate the transfer from one account to another. Once you fill out the paperwork, it will move all the funds from one account to the other, without having to worry about withholding.

Indirect Distribution

There is always the option to withdraw everything from the account yourself, and deposit it all back into the account yourself when you are ready. The employer is required to withhold 20% of the amount, just in case you do not deposit all of the money back into another account within 60 days. In order to avoid the tax implications, you must deposit all the money, even the 20% withholding amount back into another account within 60 days. If you do not, it will be treated as though it was a cash distribution.

Cash Distribution

This will cause you to fall victim to the tax penalties for early withdrawal from your 401k, in essence costing you a lot of money and time. The employer will be required to withhold 20% of the amount as payment for taxes, and if you are in a higher tax bracket, you may be required to pay more on you actual tax return. There may also be a 10% prepayment penalty for anyone who is not yet 59 and 1/2 years of age.

What if you are Not Switching Jobs?

If you cannot do the direct rollover because you lost your job, consider rolling everything into an IRA. This account will provide tax benefits while also protecting the money you have already invested into the 401k plan without the tax implications of taking a cash distribution.

Be sure to visit with a financial planner or adviser when you are transferring your money. They can make the process seamless and easy. Be sure to pay particular attention to deadlines because you will be taxed if you do not follow proper protocol. Also, a professional will help keep tabs on the money for you and help you decide which investments work best for you.

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