Understanding 401k Rollover

 

Doing a 401k rollover is the most common procedure for most people when they change companies. Rather than having to cash out their 401k, which usually results in a penalty of ten percent as well as taxes for that current year, people are able to move funds from one 401k to another, or even to a non-work related account like an IRA (Investment Retirement Account). This allows people to continue to save for retirement at their new company without having their previous earnings affected in any real way.

It sounds simple, but "rolling over" a 401k can still go wrong if a few rules aren't followed. One main rule is the same property rule, which prevents people from trying to make other income non-taxable. Basically, the money that you move has to be the same money in the account. You cannot, for example, take the money in your 401k account, purchase some other assets with those funds, and then deposit the money that is left into the new account. That purchase money will result in the ten percent penalty for an early withdrawal from your 401k.

Another 401k rollover restriction involves how often you can move money around. 401k rollovers are only allowed once a year per accounts involved. What this means is that the accounts that 401k savings are moved from and to cannot be involved with a second rollover for one year, whether they are on the receiving or giving end. This prevents quick turnarounds so you need to be sure about where you want to move your money.

There is another time rule with 401k rollovers. This one is called the 60 day rule and it means that after receiving funds from your IRA, you have to rollover the money to another IRA. This rollover is not counted with the above one year rule. If you don't do this, then not only is the income treated as ordinary and taxable income, but you will also be considered to have withdrawn the funds and have to pay the ten percent penalty if you are younger than fifty-nine and a half.

When you are a planning a 401k rollover, it is best to seek the opinion of someone who gives out professional 401k advice. One way to ensure that you do not run into problems with rollovers is to take advantage of transfers instead. A lot of situations will allow you to do a transfer of your savings rather than a formal rollover and it will be a much easier process for you.

Related topics about 401k rollover

Rollover To Ira
Any rollover to IRA should be carefully thought out before any action is taken. The rollover plan is there to help people avoid paying penalties and high taxes, yet if the transaction is not done properly, then financial losses can occur anyway.

401k Retirement
There is no point in saving a lot of money in your 401k retirement plan and then losing some of the profit you have made by making an early withdrawal. The plan is there for retirement purposes, not for any other reason.

Benefits 401k
Social security is in real danger and so the benefits 401k plans offer have been looked at very closely in recent years. There are lots of good reasons to invest your money in a 401k account, namely that it could be the only real source of income you will have once you stop working, given the doubts of social security's ability to sustain itself for much longer.