Retirement account owners transfer or roll over more than $300 billion in assets between different accounts each year. If you've left your job, you can roll your 401(k) assets over to an IRA, just as you can transfer assets from one IRA to another. Like IRA-to-IRA rollovers, there's a time limit, with penalties for late transfers. Asking the account trustee to make the transfer is penalty-free and therefore safer.
You have just 60 days to roll your assets over from your 401(k) to your IRA. Any longer -- even 61 days -- and the IRS treats the rollover as if you'd taken a cash withdrawal. If you took out, say, $25,000 from your 401(k) and deposit it in your IRA on day 65, your taxable income for the year just went up by $25,000. If you're under age 59 1/2, you also pay a 10 percent early withdrawal penalty.
Blame the Bank
One way to duck the tax bill is to show the late deposit wasn't your fault. If you did everything right but the bank screwed up, you get an automatic waiver from the IRS. To qualify, you have to show that the bank got the money before the 60 days ended and that you followed the rules for rolling the money over. If you made a mistake that would have prevented the rollover anyway, you don't get the waiver.
If you can show you were right and the bank wrong, it's an open and shut case. In other circumstances, the IRS has to weigh different factors before deciding whether to cut you some slack. If you couldn't complete the rollover because you were in the hospital or jail, or the Post Office made a mistake in mailing the check, you have a good shot. You can also request a time-limit extension if one of the banks involved becomes insolvent and your money is frozen.
When you roll over 401(k) money, the account trustee has to take out 20 percent for withholding -- on a $20,000 rollover, for example, you'd only get a check for $16,000. If you don't deposit the full $20,000 within 60 days, however, it's catch-22 time: the IRS treats the missing $4,000 as a withdrawal and taxes it. You're also supposed to roll over the exact same assets you took out of the 401(k). If you convert non-cash assets to cash, then deposit the money, the IRS may bill you even if you meet the deadline.