401(k) rollover rules
Learn more about the rules that govern 401(k) rollover and make informed decisions about your retirement savings. Or, speak to a financial advisor by answering a few questions below.
Summary
Rolling over to a Roth IRA may involve upfront taxes but offers tax-free withdrawals in retirement.
Indirect rollovers must be completed within 60 days to avoid taxes and penalties.
Unbiased will match you with a financial advisor to guide your 401(k) rollover and retirement planning strategies.
What is a 401(k) rollover?
A 401(k) rollover is the process of transferring funds from an existing 401(k) account to another retirement account, such as an IRA or a new employer’s 401(k).
There are many reasons people choose to opt for a rollover, including to gain more investment choices, reduce account fees, or consolidate their retirement savings into one account for easier management.
It’s a way to keep your retirement savings working hard for you, even when changing jobs or switching to a better financial strategy.
You can learn more about 401(k) rollovers and the different types here.
While the process may sound simple, there are many rules in place you must follow to avoid high tax penalties.
What are the key 401(k) rollover rules to know?
These are the most important 401k rollover rules you need to understand to make the most of your investment:
60-day rule for indirect rollovers
If your 401(k) funds are sent directly to you instead of your new account, you have 60 days to complete the rollover to avoid taxes and penalties.
For example, suppose you receive a check for $5,000 and fail to deposit it into a new retirement account within the 60-day window. In that case, the IRS will treat it as a withdrawal, subjecting it to income tax and possibly an early withdrawal penalty.
Being aware of individual 401(k) rollover rules can prevent costly mistakes.
No mandatory withholding for direct rollovers
With a direct rollover, the money is transferred straight from your current plan to the new account, bypassing you entirely. This eliminates the need for tax withholding, making it a simpler and more efficient process.
For instance, if you’re rolling over $100,000 directly to an IRA, the full amount will be transferred without any deductions, ensuring your savings remain intact.
Conducting a direct 401(k) rollover is an excellent way to simplify the process.
One rollover per year rule
The IRS limits you to one rollover per 12-month period across all your IRA accounts. This means careful planning is essential.
For example, if you roll over $20,000 from one IRA in March, you won’t be able to initiate another rollover until the following March.
Violating this rule could result in taxes and penalties, so it’s crucial to track your rollover activities.
What are the key 401(k) rollover to IRA tax rules to know?
These 401k rollover to IRA rules are essential for maximizing your investment and reducing your tax liabilities:
Traditional IRA rollover rules
When rolling over to a Traditional IRA, your funds remain tax-deferred, meaning you won’t owe any taxes on the transfer. This makes it a smooth option for preserving your retirement savings.
For example, moving $75,000 from a 401(k) to a Traditional IRA allows your money to continue growing tax-deferred until withdrawal.
For more details on this process, check out this guide on how to roll over your 401(k) to IRA.
Roth IRA rollover rules
Rolling over to a Roth IRA means transferring your funds into an after-tax account. As Roth accounts grow tax-free, taxes are owed upfront on the amount transferred.
For example, if you move $50,000 from a 401(k) to a Roth IRA, you’ll owe income tax on that amount for the current tax year.
While this might feel like a financial hit in the short term, it allows for tax-free withdrawals in retirement.
It’s also worth remembering rollovers are not seen as contributions, so they do not have to be included in your contribution limit for the year.
5 steps to complete a 401(k) rollover successfully
Here’s a step-by-step guide to help you complete your 401(k) rollover smoothly:
Contact your current plan administrator to initiate the process and request a rollover.
Choose between a direct or indirect rollover, keeping in mind the pros and cons of each. Remember, direct rollovers are typically easier and come with fewer risks.
Open an IRA account (if applicable) or have your new employer’s plan details ready for the transfer.
Monitor the transfer carefully to ensure everything is completed within the required time frame, especially for indirect rollovers, where timing is critical.
Confirm the transfer is complete. Double-check your new account to ensure the funds have arrived safely and accurately.
Get expert financial advice
By following the key 401(k) rollover rules, you can smoothly transfer your retirement savings while avoiding unnecessary taxes and penalties.
A well-planned rollover ensures your financial future stays on track, giving you greater control over your investments.
Let Unbiased match you with a financial advisor for expert financial advice in navigating your 401(k) rollover and making the best decisions for your retirement savings.
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