Indirect 401(k) Rollover Rules
401k plans are retirement accounts that allow pretax contributions to the plan. But, when you retire or leave your job, you may wish to take your 401k with you. To do this, you may move the money via an indirect rollover to your 401k plan to a new 401k plan or to an IRA. Make sure you understand how this is done to avoid IRS penalties.
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New Account Setup
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Set up a new account to which to deposit your funds. Fill out an application with the new financial institution you will be using. If you are transferring to a new employer plan, then you must verify that the new 401k accepts rollover deposits. If you are depositing the money into an IRA, then you simply need to fill out an application for a new IRA with a financial institution of your choice. Once the account is set up, you will receive an account number.
Rollover Request
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Request a rollover form from your 401k plan administrator. The administrator will send you a rollover request form for you to fill out. This rollover request form must include your existing 401k plan account number, the account balance and when you would like to receive your funds. There are two types of rollovers. A direct rollover is when the plan administrator sends your retirement account balance to you with the name of the new financial institution as the payee. When you perform an indirect rollover, the plan administrator sends a check to you with you as the payee and temporarily withholds 20 percent of your total account balance as a prepayment of income tax if you fail to perform the rollover.
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60 Rule
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Deposit the check into your checking account. Then, write a check from your checking account to your new 401k plan or Individual Retirement Account. You must deposit the funds into your new 401k or IRA within 60 days. If you fail to do so, the IRS will treat the rollover as a distribution and will tax it at ordinary income tax levels. The IRS also imposes a penalty on the distribution if it's made prior to age 59 1/2.
After you've deposited the check into your checking account, contact your former 401k plan administrator and direct the remainder of the funds that were held back for tax purposes to be sent to your new retirement account.
Limitations
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You may only perform a rollover from your account once in a 12-month period. This means that if you rollover funds from your 401k plan, you may not make another rollover from that same account within a 12-month period.
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