Avoid These 3 Critical Mistakes When Rolling 401(k)

NOTThese days, it’s not common to see someone stay in the same job for their entire career. If you find yourself in a situation where you get a new job – and a new 401(k) plan – but don’t want to have to manage multiple 401(k) plans in different places, you have the option of making a 401(k) rollover.

Rolling over your 401(k) has its upsides, but it can also have downsides if you’re not completely familiar with how it works. Here are three critical mistakes to avoid when making a 401(k) rollover.

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1. Indirect rollover for no reason

When you decide to do a 401(k) rollover, you have two main options: a direct rollover and a indirect bearing. With an indirect rollover, the money is paid to you, then it’s up to you to take it and put it into a rolling IRA within the required time frame as defined below.

With a direct rollover, you don’t touch the money that is rolled over; it switches from your old plan to your new plan. In some cases, your old plan may write a check to your new plan provider for the rollover amount, and you will be responsible for passing it on, but it’s still considered a direct rollover because the check was written on the new plan. and not to you.

Doing a direct rollover can eliminate some of the steps involved in rolling over funds. If you don’t need access to the funds you’re transferring, you can save yourself the hassle by choosing to transfer directly.

2. Not following the 60-day rule

If you decide to do an indirect rollover, you absolutely need to be aware of the 60-day rule, which states that you have 60 days from the date you receive the money from your old plan to deposit it into your new plan. or redeposit it. in your old plan. If for some reason you don’t deposit the money within 60 days, the IRS will treat it as a withdrawal and you will have to pay taxes on the full amount. If you are under 59.5, you will also face a 10% early withdrawal penalty.

Not following the 60 day rule can be a costly mistake.

3. Not knowing the tax implications

If you decide to do an indirect rollover, the IRS requires your former plan provider to automatically withhold 20% of the total amount you are rolling over. So, if you transfer $200,000, you will only receive $160,000. And, to add insult to injury, you will be responsible for making up the withheld amount when you deposit the money into your new plan. Here are the three tax consequences you may face during an indirect rollover:

  1. You will owe no tax if you add $40,000 to the $160,000 you received and deposit the entire $200,000 into your new account.
  2. If you deposit the $160,000 and not the withheld $40,000, the $160,000 will not be taxable, but you will have to pay taxes on the $40,000 and you may have to pay a 10% early withdrawal penalty .
  3. If you don’t redeposit any of the $200,000 within the 60-day grace period, you’ll have to report the $200,000 as taxable income and the $40,000 withheld as taxes paid.

Not knowing the tax implications of an indirect rollover can result in a costly tax bill that you didn’t expect.

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