401(k) Rollover Process
For various reasons, you may need to rollover funds from a 401k to an IRA. The process is relatively easy. However, it is very important to follow the rules to avoid tax penalties.
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Open IRA Account
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Open your new IRA prior to making a rollover request. Notify your new IRA custodian that you'll be depositing funds into your account through a rollover process. You must fill out an application to open an IRA. Once your application is approved, the account is ready for you to make a deposit.
Rollover Request
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Request a rollover from your employer. You will need to get the required paperwork from your employer to close your 401k plan and withdraw the money. Once you submit the rollover request, your plan administrator will process your request and send you the funds within several weeks. Your plan administrator will withhold approximately 20 percent of your 401k plan balance for tax purposes. The 20 percent is meant to cover most or all of the tax liability you will incur if you fail to perform the rollover properly.
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Deposit New Funds
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Deposit the check that your plan administrator gives you into your bank account. Then, write a check to your new IRA. The new IRA must be funded within 60 days, otherwise the IRS will treat it as a distribution on which you will be required to pay income tax plus a 10 percent penalty if you are under age 59 1/2. It is very important to deposit the full amount of your 401k distribution, including the 20 percent withheld by your 401k plan administrator, into your new IRA account. This means that the 20 percent will initially come out of your own funds. You can then contact your 401k plan administrator and request that the 20 percent withheld be reimbursed.
Alternatives
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Instead of rolling over your 401k plan money, consider a transfer. A direct transfer does not allow you to take receipt of the funds. Instead, your plan administrator sends the money directly to your new IRA. This avoids any possibility of a penalty, and the plan administrator does not withhold 20 percent for taxes.
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