In today’s world, few workers will remain with one employer throughout their lifetimes. As you move from one employer to another, you have the choice of bringing your 401(k) retirement account with you, by directly transferring, or rolling over, that account to your new employer’s plan. You have having avenues for accomplishing this transfer, but some are more complicated and costly than others.
A rollover occurs when you remove money from one tax-deferred account and deposit into another tax-deferred account within 60 days. There are two varieties of rollovers. The first, and simplest, is the trustee-to-trustee transfer, or direct rollover, where your 401(k) moves directly from your old plan to your new plan, with the entire transaction handled by the trustees or custodians of the respective plans. Alternately, you may still achieve rollover status, even if you personally receive the distribution of the 401(k) funds. To do so, you must deposit the entire amount, which includes any taxes withheld, into a new 401(k) or another tax-deferred account, which include traditional IRAs, tax-sheltered 403(b) annuities and government 457(b) plans.
In this both scenarios, you will receive a Form 1099-R regarding the transaction. Box 7 of the form will contain a number or letter code disclosing the type of payment the trustee made. In a direct rollover from one 401(k) to another, the code “G” will appear here. In a Roth IRA to Roth IRA transfer, the code is “H.” Taxpayers should pay special attention to box 2a, which contains the amount of the distribution that is taxable. Generally for direct rollovers, this number is $0.
Direct transfers can save many retirement investors both money and hassle. In a direct rollover, you never have to handle the money or ensure that it gets successfully shepherded to the new account, and the exchange is very rarely a taxable event. On the other hand, if you take direct receipt of the funds, you have to make certain the money finds its way into a new tax-deferred account within 60 days. You also face a financial cost in using this method. That’s because the trustee of the old account will withhold 20 percent of the funds. To satisfy the IRS rules regarding rollovers, you have to deposit the full amount into your new account. So, for example, if you have $125,000 in your 401(k) and take direct receipt as part of your rollover process, you’ll receive payment of only $100,000, but you must place $125,000 into your new tax-deferred account within 60 days, meaning you must contribute the additional $25,000 from other sources. You will recover that $25,000 when you file your taxes, but you will lose the benefit of those funds until such time as you receive your refund.
Your 401(k) is a vital part of your retirement plan, and rolling it over from one plan to another requires following the proper processes to ensure you avoid any unnecessary tax liabilities. For advice about your retirement accounts, rollovers and tax status, consult the attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C. Our attorneys have years of experience advising retirement investors in New York and New Jersey regarding the best ways to preserve their accounts’ tax-deferred status. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.
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