How to Roll Over a 401k Directly: Steps and Considerations

Summary: Learn about the 401k withdrawal process, including how to avoid taxes and roll over funds into an IRA. Find out more with Financial Advisor Tim Hayes.

If you receive the 401k withdrawal, the 401k plan must withhold 20% for taxes on any eligible rollover distribution. You will have 60 days to roll that distribution into an IRA; however, if you do not have the 20% available, then the amount withheld for taxes on the gross distribution will become taxable.

The plan sells the funds and sends over the amount as cash when you do a direct rollover. If you initiate a rollover today and have funds in the stock market with the stock market down some 20%, you will be selling with stock prices down.

The rollover can then be invested back into the stock market when the check is received at the IRA. However, reviewing your retirement allocation as you move closer to retirement is a good idea.

How Do I Roll Over a 401k Directly?

Most 401k plans have their own rollover process. Depending on the plan, either a form or a phone call may initiate the transfer. Some plans mail the check to the client. You want to make sure that a check is made out to the client’s new IRA FBO of the client. That way, the plan is not required to withhold 20% for taxes.

If you receive a check, there is no need to sign it before you send it to the IRA custodian, as it has already been made out to that custodian. The following year, you will receive a 1099R from your former 401k plan letting the IRS know that you rolled over your retirement plan distribution.

What If I am Working with a Financial Professional?

Any rollover advice falls under new requirements when working with a financial professional. First, the advisor should make a reasonable effort to determine the costs and fund lineup in your 401k plan. The advisor should compare these to an IRA investment and present both to the client so they can make a more informed decision.

These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third-party sites should not be considered an endorsement of content that we cannot verify completeness or accuracy of.

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Tim Hayes

Tim has offices located in Boston and South Dartmouth, Massachusetts. He is licensed to handle securities in six states, including Massachusetts, Rhode Island, New Hampshire, Connecticut, Maine, and Florida. Moreover, he can provide investment advisory and financial planning services to clients in all 50 states.

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