How To Rollover 401K Funds into an Individual Retirement Account

2019/02/25

A 401k Rollover is all about transferring your money from one tax-deferred account to another when you’re leaving a job and switching over to the next. The new account can be a 401k plan account or an Individual Retirement Account (IRA).

Now, when you move your money from one account to another, make sure you don’t make the following mistakes and get hit with a tax bill from the Internal Revenue Service (IRS).

Not Completing The 401k Rollover in 60 days:

There’s a 60-day period within which you should roll over the money in your 401k account into another retirement account. If you don’t roll over within this period, your 401k funds will be considered as ordinary income and you’ll have to pay income tax on the entire distribution. Moreover, if you’re under 59 and 1/2 years of age, you’ll need to pay a 10% penalty on the withdrawal.

Not Transferring The Same Assets To The Rollover Account:

You should transfer the same assets in your 401k account to the rollover account. This means that you can’t take out cash from your 401k account and use it to purchase other investments, before you roll over the funds into the new account. If you do so, the IRS will consider the distribution as ordinary income, and you’ll end up paying a huge tax bill.

Forgetting The One-Year Waiting Period:

You can roll over funds from a 401k account into another IRA once a year. This one-year period starts from the date you receive the 401k distribution and not the one when you roll over funds into the IRA account.

Not Repaying 401k Loans Before The Rollover:

If you don’t repay 401k loans before the rollover, you may end up paying income taxes on the outstanding balance.

Consulting Your Employer Regarding the Rollover:

If you need advice regarding 401k Rollover, you shouldn’t consult your employer, as he may not have the license to offer financial advice. Instead, you should seek the advice of a certified financial planner.

Considering The Required Minimum Distribution:

The Required Minimum Distribution (RMD) is the minimum cash amount you must withdraw from your 401k plan account annually once you reach 70 and 1/2 years of age. If you’ve reached that age and you’d like to roll over 401k funds, you can’t include the RMD in your new rollover account.

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