401K Rollover

One of the first things you might consider after making a job change or retiring is a 401(k) rollover. You can take your pre-tax payroll deductions that have been made through your past employer’s 401(k) retirement plan and roll them over into an IRA.
Normally your former employer will provide you with information regarding your options but that is not always the case so you need to do a bit of your own research.

Here are some simple steps to affect a 401(k) rollover:

• Open a rollover IRA. Go through your stock broker or complete an IRA application online.
• Contact your former employer and notify the 401(k) plan administrator that you want to rollover your 401(k) assets to an IRA.
• Complete any required distribution forms required by your former employer. Make note of the benefits contact information and with whom you have spoken with and when for follow up questions or concerns.
• Confirm that the distribution of your funds has been completed by your employer or plan administrator.

Don’t be fooled that because the process seems so simple that there are no concerns. The rules of 401(k) rollover are strict.  To avoid penalties or taxes being withheld, you must follow certain procedures and be aware of time limitations. Commonly, if you haven’t reached the age of 59 ½ you can rollover lump sum payments that were ‘before-tax’ when contributed to your 401(k) by either distributing as a direct rollover or being paid directly to you.

As part of the direct rollover, the funds in your 401(k) account are paid directly into your new IRA and no income tax will be withheld and no penalty will be owed.

If you choose to be paid, it is critical that you are aware of potential tax penalties. When you receive your distribution you will be made aware that 20% in taxes has been withheld. This is a regulatory requirement, although you might not actually owe that amount of tax. To avoid taxes and penalties (such as current income tax and 10% penalty for early withdrawal if you are not yet 55) you can deposit 100% of your rollover distribution into your IRA within 60 days, although you must make up the 20% yourself. When you file your taxes you may claim the 20% as Federal income tax withheld.

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