401(k) Rollovers

Recently, my husband switched jobs, and in an effort to create financial balance among his multiple retirement accounts, he attempted to roll his two outstanding accounts into his newest job's 401(k).  Both of the original accounts were denied rollover, so we had to investigate the 401(k) rules to determine our best strategy.  Let's look at what I found.

What's a Rollover?

Rollover is simply the act of moving your money from one account to another. This most commonly happens when you change jobs. There are two types of rollovers, direct and indirect.

Direct Rollover

The best bet, if possible, is to authorize a direct rollover.  You simply request in writing a direct rollover from your former employer, and your ex-employer will write a check directly to your new IRA custodian.  You will not be subject to tax withholdings, taxes or penalties.

Indirect Rollover

In an indirect rollover, your former employer sends you a check, and it's your responsibility to get the funds to their appropriate destination.  This can be a dangerous act for a couple of reasons. First, you only have 60 days to complete the transaction, if you don't complete the steps, then the money is treated as a cash distribution (see below). The second reason is that your employer has to withhold 20% to pay taxes in case you don't move it to a new account. So as you can see, in pretty much every way a direct rollover is easier than an indirect rollover.

Cash Distributions

A cash distribution means you take the money out of a retirement account. Unless you have reached the age limit, you'll have to pay a 10% penalty for withdrawing the money, and then you have to immediately pay taxes on it. Your employer will withhold 20%, but you may actually owe more than that. As you can see, this isn't a desirable choice unless you really need the money or are old enough to take it out without penalty (although you'll still have to pay the taxes.)

Other Details

There are many details to these actions and we'll cover some specific situations later. The key here is that when you change jobs, make sure to go ahead and rollover your retirement accounts as quickly as possible so that you don't risk having to do an indirect rollover or accidentally take a cash distribution.

In my husband's case, he had already converted both of his prior 401(k) accounts into Roth IRAs and thus couldn't move them into his company 401(k). Finally, all the rules straightened out, I can find a better balance in our multiple 401(k) accounts. 

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