401k Rollover Rules – Go Direct

A direct trustee-to-trustee transfer is the simplest way to rollover funds from a 401k to another retirement account. This transaction goes from institution to institution and is governed by strict rules that depend upon the age of the account holder. An indirect transfer is one in which the funds are disbursed to the account owner to reinvest, going from institution to owner to institution. Indirect transfers are subject to the same age-dependent 401k rollover rules as direct transfers but are subject to additional withholding and penalty rules.

A direct rollover is always the easiest course of action.  Don’t believe me?  Feast your eyes on the following 401k rollover rules:

Direct 401k Rollovers

Account owners age 70.5 and above must take a Required Minimum Distribution, usually about 10% of the fund value, before rolling over the fund’s balance.

Younger need only complete the forms and the entire amount will rollover to the new fund.

Indirect 401k Rollovers

Account owners age 70.5 and above will receive the funds as a distribution. The IRS requires the fund’s administrator to withhold 20% of the total value for application to taxes for that year. The account owner must take the Minimum Required Distribution and then has 60 days to deposit the remaining money into a qualified retirement account. Failure to do so within 60 days will result in the entire distribution being counted as income for that year.

Account owners age 59.5 to 70.5 will have 20% of the account value withheld, and receive a distribution of 80% of the account’s value. They then have 60 days to place 100% of the account value into another qualified retirement account to complete the rollover. Failure to put the full original value of the account into the new plan will result in penalties for early withdrawal of funds. Failure to complete the rollover within 60 days will lead to the total amount of the distribution being counted as income for that year.

Account owners age 59.5 and under are subject to the 20% tax withholding amount. They are also subject to a 10% penalty imposed on their funds. 401k funds are considered long-term retirement savings, so any distributions taken before age 59.5 are considered income and penalized for early withdrawal. Not only is the 10% penalty deducted before distribution, but it is also non-refundable even if the total value of the account is deposited into a qualified retirement account within 60 days.

The direct trustee-to-trustee transfer is always the simplest way to rollover a 401k account.