How Long do I Have to Rollover my 401k after Leaving a Job?

The 60-Day Rollover Rule

The IRS mandates that you have a 60-day window to roll over your 401(k) into another qualified retirement account. If you do not heed this deadline, the withdrawal may become taxable, and even maybe an early withdrawal penalty if you are under the age of 59½.

If you choose a rollover, you are essentially taking your cash out of one tax-advantaged account and putting it into another, either into an Individual Retirement Account (IRA) or into the 401(k) plan of your new employer. The 60-day Rule is significant in that it allows you to maintain the tax-deferred status of your retirement savings and also circumvents immediate taxes and penalties.

Direct Rollover vs. Indirect Rollover

However, it is critically important to know the difference between a direct rollover and an indirect rollover. A direct rollover is a process by which your money goes directly from your former 401(k) account into your new retirement account. Here, the 60-day Rule does not apply because the money never gets into your hands. This is normally the preferred way to do an IRA rollover since there is no danger of missing the deadline and, consequently, taxes and penalties.

The other is through an indirect rollover, where you receive the distribution from your 401(k) account and personally deposit it into the new account within 60 days. With this option, though, your previous employer is required to withhold 20% of the funds for federal taxes; this 20% will have to be replaced from your finances in order to complete the rollover without penalty.

Also, keep in mind that the 20% we withhold for federal income tax purposes will be treated as a distribution unless you deposit the full amount in your new account within the 60-day window. That means the distribution will be subject to income tax and, if you are under 59½, a 10% early withdrawal penalty.

Exceptions to the 60-Day Rule

The IRS does provide for a few exceptions to this 60-day rollover rule, but they can be drastically limited and often come with a requirement of proof of good cause. These are:

•   Disasters: The IRS may postpone the 60 days if you are affected by a federally declared disaster.
•   Mistakes: In case a credit or deposit is delayed by the financial institution, you can be compensated with an extension.
•   Disease: If you were seriously ill or disabled and could not do the rollover, you may qualify for a waiver within 60 days.
•   Lost Check: If your distribution check was lost and you can provide some proof, the extension might be allowed.

Be aware, however, that this is not an automatic right, and you will still have to apply for a waiver or prove your case in some way to the IRS.

What If I Miss the Deadline?

This rollover failure means the distribution becomes treated as ordinary income. It is thus levied with an income tax in your due earnings and, if you are under 59½ years of age, faced with a 10% early withdrawal penalty. That adds up to significant erosion of your retirement savings and long-term financial security.

Key Financial Planning Points for Your 401(k) Rollover

First things first, analyze your financial situation and goals. A few strategic considerations are:

•   Fees and Investment Options: Typically, IRAs are a substantially wider range of investment opportunities in relation to 401(k) plans, although they may have higher fees. Compare the options that you have at your disposal before deciding.
•   Employer Match Considerations: When making a transfer to a new employer who uses the 401(k)-plan system, ensure your new employer has matching benefits; these can be valuable in the long run.
•   Consolidation: Rolling over to an IRA or a new 401(k) can make your retirement savings easier to manage by bringing your accounts together. This may make managing investments and tracking progress much more streamlined.

Proper retirement savings management is at the core of building the financial future you have always wanted. If you recently left an employer and are looking for ways to handle your 401(k) better, you cannot leave your financial future to chance. Call M&A Wealth right now to schedule an investment consultation. Our professional advisors are here to help and will take you through the rollover process, making the best choice to meet your retirement goals. Let us assist you in the protection and growth of your hard-earned savings; schedule a consultation today!