401(k) Rollover Time Limitations

401k plans are tax-deferred retirement accounts. Such accounts defer the income tax due on your retirement savings. However, you may not want to keep your retirement funds in your 401k until you retire. Fortunately, you may choose to roll over your 401k plan to an IRA. But, you must know the process for doing this and how it will affect your retirement.

Process

• Rollovers allow you to move your money from your 401k plan to an IRA plan without paying tax on the transfer. Your 401k plan administrator liquidates your 401k, sends you the balance, withholds 20 percent of the balance for taxes and then you deposit the funds into your new IRA account. Once the funds have been deposited into your new IRA, you must contact your old plan administrator and have the 20 percent transferred to your new account.

Significance

• The significance of a rollover is that you are taking receipt of the funds directly. You must deposit the funds yourself and are responsible for opening the new IRA account. You must file paperwork indicating that you are performing a rollover and you are only allowed one rollover per 12 months from your retirement account. Additionally, once you roll over your funds, you may not roll those funds over again within 12 months.

Benefit

• The benefit of a rollover is that you are in full control of your retirement accounts. You have the option of moving the money to any IRA you choose. If you decide not to move your IRA funds, you may keep the funds.

Warning

• If you do not open an IRA account within 60 days of receipt of your 401k funds, the IRS will treat the rollover as a distribution. If this happens, you'll be subject to ordinary income taxes on all of the rollover money. Additionally, if you are under 59 1/2, you will be subject to a penalty of 10 percent.

Considerations

• Consider using a transfer instead of a rollover. Transfers can be done an unlimited number of times without worrying about potential tax liabilities. Transfers also do not involve you having to open a new IRA account by yourself. Your plan administrator will transfer the funds on your behalf.