Avoid Taxes on Your Rollover 401k IRA Transfer

A rollover 401k account isn’t a particular designation recognized by the IRS; however, it is a useful designation to keep in mind when managing your money, as it helps you to keep track of where you’re sending your money.
This is especially important to keep in mind when you’re moving money out of your 401k and into another type of retirement account.  In truth, this situation isn’t as unusual as it may seem.  People who have made multiple career changes or who have moved from job to job within one career may have funds in various retirement accounts hosted with old employers.  For a number of different reasons, it may make sense to consolidate these old 401k funds into a privately-held IRA through a 401k rollover.

The first thing to ask yourself when beginning this process is what kind of accounts your money is moving out of and going into.  A basic rule of thumb to keep in mind is that “like can accept money from like” when it comes to IRA transfers.  For example, if you have an employer-sponsored traditional IRA, you won’t have any trouble moving your funds into a privately-held traditional IRA.  Additionally, this rule typically extends to any transfer that occurs between two retirement funds that hold tax-deferred status.  Of course, there are exceptions, so be sure to check with your financial planner if you have any questions.

The key thing to remember to avoid taxes when performing a 401k rollover is that the preferred method for moving your money is a direct 401k rollover.  There is another financial instrument, known as an indirect rollover, but this type of transfer is often fraught with complications.  Use the indirect 401k rollover only under the supervision your financial professional, because if the indirect rollover is mishandled or the time to reinvest expires, you’ll be liable for penalties and any tax burden that’s created for the fiscal period in which you receive the money.

To initiate a direct 401k rollover, contact the manager of your new IRA (called the “target account”).  The administrator of your target IRA will, at your direction, contact his or her counterpart at the old 401k or IRA and request a direct transfer of the funds.  The value you want transferred will be sent to the new rollover or target 401k, usually by check or wire transfer.  It will never come into your hands, as the account holder.  In this way, the tax-deferred status of your money will be preserved.

As you might expect, there will be some paperwork to be filed with the IRS, but the managers of the old and new accounts will typically take care of this for you.  Know that this money is still your money, even though it never came into your hands.  By asking the administrators of the two accounts to act as your agents and by taking yourself out of the equation, you’ve reduced – if not eliminated – the risk of a new tax burden on your investment.

By adhering to this simple procedure, you’ll avoid any potential tax burden on the funds moved in your 401k rollover.

Moving Your Retirement Funds to a Rollover 401k IRA Account

There are many, many different ways to initiate a 401k rollover. In most cases, the procedure you’ll need to follow will depend on the forms and processes of the institutions that manage both your old 401k account and your new rollover IRA. To simplify matters, your best bet to think of them in stages – making sure that each one is done before moving on to the next one. By following these simple stages, you’ll be able to successfully complete the 401k rollover to IRA, while maintaining the tax deferred rollover status of your investments. Continue reading