Joe Merchant – What Every Business Owner Needs

A 401k rollover is a common occurrence when employees leave their company to work at a different place, to start their own business, or for any reason other than retirement (though it could happen during retirement as well). What it means is that instead of cashing out their 401k and taking the money and incurring taxes, (plus if they are younger than fifty-nine and a half a ten percent penalty will be imposed) people can move their funds into a different retirement account and continue saving without any losses.

It sounds simple, but “rolling over” a 401k can still go wrong if a few rules aren’t followed. One main rule is the same property rule, which prevents people from trying to make other income non-taxable. Basically, the money that you move has to be the same money in the account. You cannot, for example, take the money in your 401k account, purchase some other assets with those funds, and then deposit the money that is left into the new account. That purchase money will result in the ten percent penalty for an early withdrawal from your 401k.

Another 401k rollover restriction involves how often you can move money around. 401k rollovers are only allowed once a year per accounts involved. What this means is that the accounts that 401k savings are moved from and to cannot be involved with a second rollover for one year, whether they are on the receiving or giving end. This prevents quick turnarounds so you need to be sure about where you want to move your money.

There is another time rule with 401k rollovers. This one is called the 60 day rule and it means that after receiving funds from your IRA, you have to rollover the money to another IRA. This rollover is not counted with the above one year rule. If you don’t do this, then not only is the income treated as ordinary and taxable income, but you will also be considered to have withdrawn the funds and have to pay the ten percent penalty if you are younger than fifty-nine and a half.

With all these rules it is best to seek financial advice when planning a 401k rollover, or any kind of rollover. In some situations, usually when simply moving your funds from one institution to another, a transfer rather than a rollover could be the best solution, since transfers are unlimited and do not have the same strict rules that rollovers do. After saving up a significant amount of money the last thing you want is to lose a percentage of your funds because of a simple mistake.

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