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401k Rollover Rules

Understanding 401k Rollover Rules

Understanding 401k rollover rules and regulations is important in avoiding an unwanted tax bill at the end of the year.  A 401k rollover is the transferring of assets from the custodianship of your employer’s retirement plan into another plan, most commonly into an IRA (Individual Retirement Account).  A 401k rollover is a non-taxable event so long as it is done right.

Rules of the Road...

There are two types of 401k Rollovers, a Direct  401k Rollover and an Indirect 401k Rollover. A direct 401k rollover is distribution method usually centered around a check made payable directly to the new custodian. For example, a direct 401k rollover check might read “Stifel Nicolaus c/f John Smith’s IRA” where Stifel Nicolaus is the new custodian, “c/f” stands for “custodian for”, and John Smith is the 401k participant who initiated the 401k  Rollover. Here we see an example of a direct 401k rollover where at no time does the participant, John Smith, take possession of the money. 

The second type of 401k Rollover is an indirect 401k rollover. With an indirect 401k rollover the participant takes possession of the money and then deposits the money into the IRA. In the case of an indirect 401k rollover the distribution will most likely come via a check made payable to the plan participant. In our example, the check would be made payable to the plan participant, John Jones. It is then the plan participants responsibility to deliver the money to the new custodian. It is required that the plan participant deposits the money into an account with the new custodian within 60 days. If the plan participant fails to deposit the money into an account with the new custodian within 60 days, the distribution becomes fully taxable. Depending on the age of the plan participant, penalties may apply as well. To better understand 401k rollover rules and regulations please take a minute to order a 401k rollover kit. The 401k rollover kit is packed with information about 401k rollover rules and regulations.

 

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