The Mechanics of Completing a 401(k) Rollover

[Note: Although this information refers to 401(k) plans, the same points apply to 403(b) and 457 plans]

Don’t be intimidated by the paperwork. It might be a bit tedious but it’s not difficult. For accounts that we take under management, we do as much of the paperwork as possible. If you are going to manage it yourself, here’s how to get started:

First, you should open a Rollover IRA account. Then notify the 401(k) plan administrator that you want to roll it over to that new account. This is done completing distribution form provided by the administrator. On the distribution form, you should indicate that you want a “direct rollover”. If they will transfer the funds electronically into your IRA, great ; if not, have them make the check payable to your new IRA custodian for benefit of you, e.g. “ABC Company f/b/o John Doe”. A direct rollover should not have any taxes withheld.

Try to avoid having the check paid to you. This is an “indirect rollover”. If the check is paid to you, you have 60 days to roll it over or it will count as a taxable distribution. The IRS requires that they withhold 20% federal tax. Since the money used for withholding is not being rolled over, it becomes a taxable distribution. If you are younger than 59 ½, you will have a 10% penalty in addition to the tax. If this happens and you can’t get them to correct it, try to make up the difference from a non-retirement account within the 60 day rollover period. You’ll get the tax withheld back later as a refund.

Keep in mind that you are only allowed one 60 day rollover per year.

The paperwork is the least of it. There are many factors to consider and this might be a good time to consult a retirement planning specialist. To speak to a Certified Financial Planner™, with no-obligation, please call us at (914) 242-0553.

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