401k Rollover Rules

A 401k rollover occurs when you change jobs or retire and as a result you are entitled to distribute or “rollover” your previous employer's 401k to an IRA. It is critical to avoid negative tax implications when performing a 401k rollover so it is important to know the 401k rollover rules.

401k Rollover options available to you.

  1. Take a Cash Distribution
    If you elect to receive a cash distribution then the check is made payable to you. Distributions made payable to you are subject to federal and state income taxes. Your employer is required to withhold 20% from your distribution check as a prepayment of estimated taxes. Depending on your tax bracket you may owe more or less than 20% when you complete your tax return. In addition, your distribution is likely to be subject to a 10% pre-mature withdrawal penalty if you are under age 59 ½.
  2. Indirect Rollover
    You can elect to take a cash distribution and then deposit the money into your IRA within 60 days. Your employer is still required to withhold 20% for prepayment of federal income taxes. To avoid taxes and penalties, the entire distribution including the 20% withheld for income taxes must be deposited into your IRA. If any amount, including the 20% withholding, is not rolled over within 60 days then that amount will be subject to taxes and possible IRS penalties.
  3. Direct Rollover
    With a direct rollover, you authorize your employer to make your check payable directly to the new custodian for the benefit of your IRA. For example, the check would be made payable to the new custodian FBO John Smith. This is sometimes referred to as a trustee-to-trustee transfer and there is no tax withholding, no taxes, and no penalties with this option. Your retirement savings will continue to grow tax-deferred. In most situations, a direct rollover makes the most sense since it avoids potential tax liabilities and penalties.

There are a number of advantages of rolling over a 401k into an IRA. Learn more about the advantages of a 401k Rollover.

Beacon Capital Management Advisors is experienced in helping individual investors rollover their retirement plan from a previous employer to an IRA. We welcome the opportunity for you to speak to a BCM Advisor to learn more about the rollover services we provide to our clients.