Mistakes With A 401k Rollover
- Posted by admin on September 26th, 2009 filed in Business and Management
Cashing out a 401k early can be an expensive action, and so a 401k rollover rule was established to help people in certain situations. This rollover means to take the money in your 401k investment and move it over into another account that is also set up for saving for retirement. These types of accounts are typically known as an Investment Retirement Account, also known as IRA. These situations happen all the time, usually when an employee leaves their company and something needs to be done about their 401k savings.
It sounds simple, but “rolling over” a 401k can still go wrong if a few rules aren’t followed. One main rule is the same property rule, which prevents people from trying to make other income non-taxable. Basically, the money that you move has to be the same money in the account. You cannot, for example, take the money in your 401k account, purchase some other assets with those funds, and then deposit the money that is left into the new account. That purchase money will result in the ten percent penalty for an early withdrawal from your 401k.
There are time restrictions as well when doing a 401k rollover. You are only allowed to rollover funds from one account to another once a year. So if you did a rollover in one year, then no other rollovers could occur with the account that you transferred from, nor could any occur with the account that you transferred to. Both accounts would have a one year limit imposed upon them. If you had a second account that was an IRA, then you could still do a rollover with that account, as long as it was into a different account from the previous pair.
There is another time rule with 401k rollovers. This one is called the 60 day rule and it means that after receiving funds from your IRA, you have to rollover the money to another IRA. This rollover is not counted with the above one year rule. If you don’t do this, then not only is the income treated as ordinary and taxable income, but you will also be considered to have withdrawn the funds and have to pay the ten percent penalty if you are younger than fifty-nine and a half.
With all these rules it is best to seek financial advice when planning a 401k rollover, or any kind of rollover. In some situations, usually when simply moving your funds from one institution to another, a transfer rather than a rollover could be the best solution, since transfers are unlimited and do not have the same strict rules that rollovers do. After saving up a significant amount of money the last thing you want is to lose a percentage of your funds because of a simple mistake.
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