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401(k) Tip |
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Watch out for the tax bite. If you indirectly roll over a 401(k), your employer will deduct 20% withholding from the value of your account. You have 60 days to complete the rollover. |
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You can handle a rollover yourself by withdrawing money from your account and depositing it in your new employer’s plan or an individual retirement account (IRA). You may opt for an indirect rollover to take advantage of a short-term loan if you’re temporarily between jobs or you’re waiting to close on your old home to make the down payment on a new one.
However, opting for an indirect rollover as a short-term loan should be a financial last resort, since you’ll face early withdrawal penalties unless you repay the loan within 60 days.
When you indirectly roll over a 401(k), your employer gives you a check for the value of your account, minus 20% withholding. The IRS requires your employer to take out that 20% in case you decide to keep the money rather than roll it into another account. If you complete the full rollover within the time limit, the withholding will be returned to you when you file your tax return for the year. However, if you do decide to keep the money, the withholding will go towards the taxes you’ll owe on the early distribution.
Once your employer hands you your check, you have 60 days to complete the rollover. Hold the money any longer, and you’ll have taken a full lump-sum distribution whether you meant to or not.
The trick is that when you deposit your money into a new account, you must roll over the full balance of your original 401(k). So, you’ll have to fund the 20% that is withheld to cover the full amount of your previous balance. Otherwise the 20% withholding will be treated like an early distribution, and you’ll have to pay the taxes, a possible penalty and worse yet, the money will no longer be tax deferred. These factors make an indirect rollover unappealing on many levels.
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