Where Can You Put Your 401(k) When You Need to Roll It Over?
If you've been fired or quit your job, you have the option to take your 401(k) with you as you walk out the door. Normally, the IRS limits how much money you can withdraw from your 401(k) before you turn 59 1/2, but there's no limit to how much you can "roll over" into a new account after you quit. To avoid tax penalties, however, you have to follow the IRS rules.
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Types
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You can roll over your 401(k) into any kind of plan except a "simple" IRA, the IRS states. That includes your new employer's 401(k) or other retirement plan, a Roth IRA or a traditional IRA. With most of these rollovers, you'll pay no taxes on the money you withdraw from the 401(k). Roth plans are an exception because unlike other retirement plans, you pay taxes on money you deposit in a Roth, then withdraw it tax free later.
Time Frame
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You have to move fast when you roll over money: The IRS gives you 60 days to transfer the contents of your 401(k) to another account. If you take any longer than that, the IRS will treat the transfer as if you'd withdrawn the money and expect you to pay income tax on it. If you're under 59 1/2, the IRS states it will also assess a 10 percent tax penalty for early withdrawal from the 401(k).
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Waiver
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The IRS will grant you a waiver on the 60-day limit under certain circumstances. For example, if the delay was the fault of the bank or financial company handling the money, or if you were delayed by disability, a death in the family or that you live in a federally declared disaster area, you can get a waiver.
Direct Transfer
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Another problem with the rollover is that the IRS will hit you with a 20 percent withholding tax, which your former employer will take out before sending you the money. The best way to avoid this, "Smart Money" magazine states, is to have the trustee for your 401(k) transfer money directly to your IRA, new 401(k) or whatever account it's to be rolled into. If you do this, there's no 20 percent penalty, and no risk of you screwing up and taking longer than 60 days for the transfer.
Benefits
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Even if your employer doesn't require you to roll over the money, "Smart Money" states, it might be a smart move. An employer's plan usually has a set number of investment plans you can select from; if you roll the money over into an IRA, you can design an investment strategy of your own.
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