How to Roll Over a 401(k) After You've Left Your Job
Usually, you can't touch your 401(k) money until you turn 59 1/2 years old. However, if you leave your employer, you're allowed to take distributions. You can continue the money's tax-sheltered growth and avoid early withdrawal penalties by rolling it over.
Eligible Accepting Plans
You can only postpone paying taxes on your nest egg if you roll it into another tax-deferred qualified retirement plan such as another 401(k), a 403(b) or a traditional individual retirement account. If you move the money to a Roth account, such as a Roth IRA, you pay taxes but no penalties on the conversion. However, you won't pay taxes on the conversion amount when you take qualified distributions later.
To roll over your 401(k), you typically must cash out your account. Then you redeposit the amount you had in your 401(k) into another qualified account within 60 days. Your employer must withhold 20 percent of your distribution for taxes, so you have to make up that money from your own pocket if you want to do a full rollover. For example, if you cash out $50,000 from your 401(k) plan, you only get a check for $40,000. To avoid having that last $10,000 count as a distribution, you have to come up with $10,000 from another source to complete the rollover.
After you complete your rollover, you must report it correctly on your income taxes, using IRS Form 1040 or Form 1040A. The distribution gets reported as a nontaxable pension and annuity withdrawal. You write "0" on the line for the taxable portion and "rollover" next to it. Also report the amounts withheld from the withdrawal for taxes, found in Box 4 of IRS Form 1099-R, as taxes withheld so you can get that money refunded.
If you have at least $200 in your 401(k), your company must give you the option of using a direct transfer rather than a rollover to move your cash to another account. A transfer means your 401(k) plan administrator moves the money directly from one account to another, so you don't have to worry about meeting a deposit deadline. Since it's not a rollover, there's also no withholding, so you don't need to come up with any out-of-pocket cash to complete the move.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."