You can do a 401k rollover under 3 circumstances only:
– You reach the age of 59.5 and want your money
– You quit your current employer and want to rollover into an Individual Retirement Account (IRA)
– You officially retire (age of 65)
If you meet any of the above characteristics, you can inform your employer by filling out a 401k election form. This will inform the employer whether you are:
– Carrying out a lump-sum 401k rollover
– Desiring regular 401k distributions (more like monthly income payments)
– Rolling the money into another 401k plan or an IRA
This 401k election form is made out to a trustee within your company who then forwards it to the 401k vendor. The 401k vendor then processes the paperwork and will inform you of the total 401k distributions you are eligible for. This process takes about 2-3 weeks.
401k Direct Rollover into IRA
|Direct Rollover (IRA to IRA)||Direct Rollover (401k to 401k)|
|– Money moves from your 401k into an IRA or another 401k
– Money rolls over from one trustee to another trustee
– Retiree does not have to worry about paying taxes
– You fill out a form, custodian moves your money for you
– Takes 1-2 weeks
|– Fill out a 401k election form (with your old employer)
– Fill out more 401k paperwork with your new employer
– Takes 2-3 weeks
Commonly Asked 401k Rollover Questions
1) Should I Have More Than One Rollover IRA Account?
Yes you should have more than 1 rollover IRA account for the following reasons:
a) If you plan to invest in a diversified set of investments example certain mutual funds, energy and growth stocks, certain bonds, etc.
b) If you want to withdraw your money in equal monthly/quarterly/annual payments with a linear distribution.
c) If you have multiple beneficiaries and want each IRA account to have 1 different beneficiary
2) How does a Rollover IRA account differ from an ordinary IRA account?
A Rollover IRA differs from an ordinary IRA account because it has NO contribution limit per year. The traditional IRA (Individual Retirement Account) and the Roth IRA both have contribution limits of $18,000 in the year 2015. However to rollover money into an IRA account, there is no contribution limit.
3) Rolling Over into IRA account after Receiving a Check?
If you quit your previous employer, you may receive a 401k distribution check from him. If you want to avoid paying 20% tax on it, immediately send it back to the employer asking for a 100% rollover of your entire retirement savings into a Rollover IRA account. This is known as a “Direct Rollover.”
The other option is making out the check directly to your IRA Rollover account, known as an Indirect Rollover. This can be done by depositing the original check into your ordinary checkings account and then writing a new check to your IRA Rollover account.
4) Can the Entire Retirement Savings be Rolled Over into IRA account?
Absolutely! However, you must rollover the entire distribution check within 60 days of receiving it. This is known as an indirect rollover. If you go above the 60 day limit, you will have to pay taxes on your entire pension distribution as well as an early withdrawal penalty fee (usually 10%).
5) Why did i Receive only Part of my Entire 401k Retirement Savings?
The IRS rule says that atleast 20% of all retirement savings account must be withheld (to pay the appropriate taxes) from any retirement savings account. This withholding of 20% can be bypassed by doing a direct trustee-to-trustee IRA rollover and 100% of your money will end up in your Individual Retirement Account (IRA).
6) I Asked for a Direct IRA Rollover but Employer Sent me a Check?
If this happens, no worries. If the check is made out to your Rollover IRA account but physically delivered to you, just mail it (via some secured delivery method such as Fedex with tracking code) directly to your Rollover IRA account. Make sure you mail the ENTIRE amount (known as a 401k lump sum rollover). This will defer any taxes you owe.
7) Isn’t there a $2000 Contribution Limit to an IRA Rollover?
There is no contribution limit to an IRA Rollover account. The $2000 contribution limit is for an annual IRA contribution limit which is different from an IRA Rollover. You can transfer as much as you want in an IRA Rollover, whether its $20,000 or $200,000.