Once you decide to roll over an employer plan to an IRA or new employer plan, you work isn’t finished. There are different ways to do the rollover, and you need to be sure it’s done right.
One way to roll over an account is to have the plan make out a check to you. After the check is issued, you have 60 days to deposit the account balance in a qualified IRA or employer retirement plan. Fail to make the deposit within 60 days and the distribution is included in your gross income. You’ll owe income taxes, and if you’re under age 59½ a 10% early distribution penalty in addition.
A lot can go wrong in those 60 days. You could be in an accident, get sick, or lose track of things. Also, you could do everything right only to have the new plan’s sponsor put the money in the wrong account. All these things and more have happened to people. The IRS allows you to ask for a waiver of the 60-day requirement if you think you have a good excuse. But it’s expensive to have a proper waiver filed, and the IRS doesn’t waive the requirement very often.
Generally, you’ll receive a waiver only if the firm receiving the rollover made a mistake, you were free of fault, and you did everything you could to correct the mistake immediately after you learned about it. The IRS even denies waivers when someone dies within the 60-day period.
Another reason not to take the check is that the plan has to withhold 20% for income taxes. You have to come up with that 20% from other sources to make the rollover complete. You’ll get a refund of the withholding after filing your income tax return for the year.
Don’t take a check from a retirement plan. You want a trustee-to-trustee transfer. Have the administrator of the plan you’re leaving transfer the money directly to the new IRA or employer plan. You’ll have to open the new IRA or other account. With an IRA, you complete a form requesting the IRA custodian to have the funds transferred from the old account. The IRA custodian will contact your 401(k) plan administrator and be sure the account is transferred. There’s no 60-day rule with a trustee-to-trustee transfer.
In either case, follow up. Once the account is transferred, be sure it is deposited in an IRA or your new employer’s retirement plan. Sometimes firms make a mistake and deposit transfers into taxable accounts instead of IRAs. You don’t want the hassle of correcting this months after the fact.
RW September 2011.
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