401k Rollover Rules You Should Know
There are a number of different 401k rollover rules that you need to be aware before making a change with your current retirement plan. The tax consequences from mistakes can be extremely costly and will make recovering your retirement funds difficult. Be sure that you know what you are going to do with your funds before starting the transition period.
Let's take a quick look at some of the general rules that you will need to be aware of as you rollover your 401k. These are general rules that should apply to most 401k plans, but be aware that your specific plan may also have specific rules relating to changes from the account.
The 60 Day Rule
The first rule is one that most people have heard of if even only in passing. It is the 60 day rule. This rule is pretty straightforward in its application. It simply states that you have 60 days to transfer your funds from one retirement account into another account. The clock starts ticking on the day the distribution hits your hands.
The IRS has been notoriously unforgiving of the 60 day rule, even rejecting individuals on the 61st day. Be sure to not procrastinated depositing the funds into your new plan. This is also the reason that it is good to have your plan of action decided before taking the distribution from your current retirement plan.
In recent years, the IRS has "graciously" provided a compassion ruling meant to provide a couple of waivers to the 60 day rule. In Revenue Proc. 2003-16 lays out the following circumstances I which a waiver is likely to be granted:
- Financial institution error
- Death
- Disability
- Incarceration
- Hospitalization
Don't expect this to be a free ticket however. The waiver comes with a fee ranging from $500 to $3000 depending on the size of the account being rolled over.
20% Withholding Rule on 401k to 401k Rollovers
Exactly as the title states, when you are rolling your 401k into another employers retirement plan there is a required minimum withholding of 20% of the funds. The old plan is required to pay (on your behalf) the 20% tax liability you've acquired for your early withdrawal out of the plan. I suppose the government doesn't trust that you will make the payment from your retirement funds.
Once you have completed the rollover to the new employer's plan, you have to wait until next tax season to have the 20% returned to your via your tax refund. For this reason rolling your 401k over into another 401k can force an unfortunate money shortage to make up for the temporary shortfall the tax creates.