When it comes time to rollover your 401k there are a few 401k rollover rules that you need to keep in mind. These rules are important because it can mean the difference between losing no money and losing close to half of your retirement money in taxes. That is not something you want to do. There are also some 401k rollover rules on what you can and cannot rollover into a new account. There are a lot of rules based on a number of scenarios so I’m going to cover a few of the most common rules that people should know about:
- First a 401k rollover is when you transfer cash or assets from one eligible retirement account into another within the 60 day time period. This rollover can consist of all your money or part of it.
- You have 3 options to choose from: Cashing Out, Direct Rollover and Indirect Rollover. Cashing out means you keep the money and will pay quite a bit in taxes and penalties, close to half. A direct rollover is handled between your previously existing 401k custodian and your new 401k custodian and an indirect rollover means you receive a check, less 20% in mandatory tax holdings and you deposit the money, including the 20% withholding into a new IRA.
- Not all distributions are available to be rollover over. Those that aren’t are:
- A hardship distribution
- Nontaxable part of a distribution, like any after tax contributions you make to a retirement plan
- Dividends on any employer securities
- Cost of life insurance coverage
- A required minimum distribution or
- Distributions that are one of a series of payments based on your life expectancy, or the shared life expectancy of you and your noted beneficiary, or paid over a period of 10 years or more.
- There are also exclusions on particular loans and corrective distributions
- If you withdraw before the age of 59 ½ the law imposes a 10% tax on some early distributions.
- If you have a loan against your 401k, you need to pay it back before rolling over otherwise the remaining amount left on the loan will be considered as an early distribution and taxed as regular income.
So keep these rules in mind as you are drawing closer to rolling over your 401k. If you are not sure what rules apply to you, contact a fee only financial adviser to get a good idea of what you can expect!