How Do I Rollover My 401(k) to an IRA Without Penalty?

How do I rollover my 401k to an IRA without penalty

An easy way to rollover your 401(k) is through direct rollover – having your old plan administrator send a check for its value directly to your new IRA custodian.

When you receive your check, 20% will be withheld for federal taxes and will need to be reported on your tax return.

1. Find the Right Custodian

Experts advise contacting your IRA provider and asking for a direct rollover, wherein the money from your former employer’s retirement account will be moved directly into your new IRA. If a check is issued to you, be sure to deposit it within 60 days to avoid taxes and penalties being assessed against it.

Be sure to investigate if the custodian charges fees. These may include annual maintenance fees, load charges on mutual funds and commissions when making trades. Also take a moment to see what investment options they provide such as real estate or privately held companies if investing outside traditional approaches such as investing through mutual funds.

Consider also how easily and simply it is to navigate and manage your IRA through their online website, with customer service being of vital importance when considering self-directed IRAs.

2. Fill Out the Form

When it comes to rolling over retirement savings, there are certain key things you need to keep an eye out for. For instance, if your 401(k) plan sends you a check that is payable directly to you instead of through Schwab or Fidelity Investments as custodian, that counts as an illegal distribution and requires them to withhold 20% for taxes.

Direct rollover is another viable option, whereby your 401(k) provider sends you a check payable directly to an IRA custodian–rather than yourself. An IRA account can be opened with any financial institution–bank, credit union, online broker or financial planner among them–to facilitate your transition.

Be sure to identify your new IRA clearly when providing beneficiary details and write its account number on any deposit slip, note or check necessary. Also ensure the “Taxable amount” box remains blank if this is a direct rollover.

3. Make the Transfer

If you opt for direct transfer, it should take about three weeks for the money to arrive in its new plan; however, be mindful that sometimes it can take even longer.

Indirect rollovers require more planning. Your former employer’s administrator will send you a check made out to the financial institution where you want your money deposited; you then deposit that into your IRA.

Tip: Be sure that the person on the check clearly identifies themselves as your IRA provider in order to avoid tax complications and complications with payments.

For instance, if you hold company stock in your 401(k) and make an indirect rollover to an IRA, any growth experienced after leaving the workplace account will be taxed as ordinary income rather than receiving long-term capital gains treatment as would occur under an IRA account. This could reduce your retirement savings over time.

4. Deposit the Money

Direct rollover is the easiest and simplest way to reinvest retirement funds; simply have your IRA custodian send a check directly payable to the new IRA account. Indirect rollsovers may prove more challenging as plan administrators are required to withhold 20% for taxes which must be deposited within 60 days or they’ll incur both an income tax liability of 20% plus an additional 10% penalty tax penalty if you are under age 59 1/2.

Make sure the IRA into which you’re rolling over money is a traditional one (not a Roth). Roth IRAs may only be transferred between Roths, not pretax IRAs. If unsure how best to proceed, consult with an experienced financial professional.

If you are uncertain whether to convert your 401(k) into an Individual Retirement Account or remain with its original plan, take an honest inventory of where you stand financially now and where it would take you in five years’ time. An IRA provides more investment options than most employer plans do.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

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