Five 401k Rollover Rules You Need To Know

401k rollover rules are in place to stop you from withdrawing tax free money. When you open a 401k retirement account, you put in place a plan that will pay for the years after you stop working. However, when you do this, you also avoid having to pay taxes on that income until you withdraw it during your retirement years. That may sound like it is no big deal, but the IRS feels that any time you withdraw from this account that you could face costly taxes.

What Rules?

Consider the following 401k rollover rules that have to do with 401k retirement plans.

1. If your employer is changing plans, move your 401k into the employer’s new plan. As long as this occurs directly from one investment firm to the next, you have nothing to worry about.

2. If you are switching employers, have your employer send the funds from your old employer to your new employer’s account manager. Again, because you do not get the funds in hand, you face no penalties.

3. If you wish to move funds from a 401k retirement plan into another type of retirement plan, your employer needs to issue the check, which will then be transferred directly to the new retirement account provider.

4. For those who wish to move the funds themselves, your employer is required to hold back 20 percent of the balance for possible taxation. As long as you place the funds into a new qualified retirement plan within 60 days, though, those funds will be credited to your account.

5. If you plan to cash out the account, the employer holds back 20 percent. The IRS then charges you based on your income tax level plus a penalty of 10 percent of the balance. You lose this money from your accounts. If you need money, find out if you qualify for a hardship withdrawal or a loan instead of cashing out.

As you can see, it goes without saying that you need to take into consideration all of the options you have for rolling over your retirement plan before you actually choose one. In many situations, it may seem easier to take the money from one account and place it into another on your own, but that is not the way that the IRS sees it. Doing it that way could cost you dearly. Follow these 401k rollover rules to protect yourself from possible, costly charges.

Julie-Ann Amos is a professional writer who writes on many topics, including 401k rollover rules. For more info, check out the 401k Hardship Withdrawal blog.

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