When Can I Rollover My 401K?

A 401k plan is a retirement plan. Since the plan contributions are tax deferred, there are legal restrictions on when funds can be withdrawn and rolled over to another account.

What exactly is a 401k rollover?

A 401k rollover is simply a transfer of the funds into another account. Since 401k plans involve contributions from both the employee and employer on a tax deferred basis, there are limits imposed on transfer of these funds before retirement age.

What are these restrictions?

First, if the employee is under age 59 1/2, all the funds cannot be withdrawn. There are provisions in most of these employer sponsored for loans and partial withdrawal under some hardship conditions. But as long as the employee is still on the payroll complete withdrawal is not allowed.

If the employee terminates employment before age 55, if the funds are paid directly to the employee, there will be a 10% penalty tax imposed. This is in addition to the distribution being reported as regular income and taxed accordingly. The employer is also required to withhold 20% of all the pretax funds and forward it to the IRS, the same as wage withholdings. The employee has 60 days to roll over the 80% paid directly to them to avoid the tax and penalty.

How can I avoid all tax and penalty, including the 20% withholding?

401k rollovers are designed for people who want to avoid these taxes and penalties. If the employee has the funds transferred directly into another 401k or a rollover IRA, no taxes or withholding will apply. All the employee has to do is decide where s/he wants the 401k rolled over and what their rollover procedures are. S/He then contacts the former employer and requests the rollover per the instructions of the financial institution/new employer.

Related posts

1. Where To Rollover A 401K?
2. Can You Rollover An Ira To A 401K Without Penalty?
3. What Are The Tax Implications Of Rolling Over My 401K?
4. Is There A Penalty If I Do Not Rollover My 401K Plan?
5. What is the Penalty for Cashing Out a 401K?

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