| When deciding whether or not to change jobs, | | | | distribution check. Your 20% withholding can then |
| there are numerous things that individual's often | | | | be filed as a credit on your tax return at the end |
| consider. There is however an important aspect | | | | of that tax year. |
| that most never consider prior to making a job | | | | Here's an example of how a company 401k |
| shift. That area of consideration is how they will | | | | indirect rollover would work in the above scenario. |
| transfer their 401k retirement savings once they | | | | Let's say you have a $50,000 401k portfolio |
| have left their employer. If individuals are not | | | | account with your previous employer. You |
| careful, they could potentially loose up to half of | | | | perform a company 401k indirect rollover and the |
| their retirement savings by not transferring | | | | plan administrator sends you a check in the |
| retirement funds according to government | | | | amount of $40,000 (20% of your distribution was |
| regulations. It is recommended in most cases that | | | | withheld and sent to the IRS). To avoid the 20% |
| an individual choose a company 401k direct | | | | penalty, you must now make a rollover |
| rollover to transfer their retirement assets from | | | | contribution in the amount of $50,000 within 60 |
| the employer they are leaving. | | | | days. There could be a potential problem with this |
| It should be noted that there are often options | | | | scenario because you only received a check in the |
| available to leave your assets with your previous | | | | amount of $40,000. This means you must add an |
| employer, however, it is not recommended that | | | | additional $10,000 from your personal funds to |
| you leave retirement funds in the hands of a | | | | avoid being taxed. Provided you fund the entire |
| employer whom you no longer work for. You | | | | $50,000 within the 60 day time period, you are |
| may also rollover funds into your new employer's | | | | allowed to recoup that $10,000 by claiming it as a |
| 401k plan but this action is also highly discouraged | | | | credit on your income tax return at the end of |
| by most financial advisors. Tony Bass, President | | | | that tax year. |
| and national Financial Wealth Strategist, suggests | | | | Worst yet is the scenario of withdrawing your |
| that you perform a company 401k direct rollover. | | | | money and not rolling it over into another qualified |
| Your funds can then be distributed into a rollover | | | | retirement plan. In the same example, you have a |
| IRA plan of your choice. | | | | $50,000 401k portfolio account. A check is sent |
| Company 401k direct rollovers allow you to | | | | directly to you in the amount of $40,000. |
| transfer your retirement funds directly over to | | | | Because you never reinvest your money into a |
| your new employer's retirement plan or into a | | | | retirement plan, at the end of the year you |
| rollover IRA plan. With a company 401k direct | | | | suffer a 10% early withdrawal penalty ($5,000). |
| rollover, a retirement distribution check is directly | | | | Next, depending on your tax bracket, there is |
| made payable to your new qualified retirement | | | | then an additional 10% federal income tax charge |
| plan. This transaction can be done on your behalf | | | | ($5,000) as well as a state income tax charge of |
| and allows for the smooth transition of your | | | | let's say 7% ($3,500). With all the taxes and |
| retirement funds without having to withhold taxes | | | | penalties subtracted, your $50,000 retirement |
| or subjecting your money to potential penalties. | | | | savings has been whittled down to $26,500. That |
| By the contrast, when a company 401k rollover | | | | equals to almost half of your original retirement |
| distribution is paid directly to you, it is called an | | | | investment. |
| indirect rollover. Law requires that the plan | | | | As you can see, it is far better to perform a |
| administrator withhold 20% of your funds in an | | | | company 401k direct rollover so that you never |
| indirect rollover. This money is sent to the Internal | | | | have to worry about paying taxes or early |
| Revenue Service as a federal income tax | | | | withdrawal penalties. Company indirect rollovers |
| withholding. In addition, you may also be hit with a | | | | can become complicated as well as force you to |
| 10% early withdrawal penalty. This government | | | | allocate personal funds that will be tied up until tax |
| penalty is designed to discourage you from | | | | filing season. In a worst case scenario, you could |
| withdrawing your retirement money early. | | | | end up loosing almost half of your retirement |
| To avoid paying the taxes on a company 401k | | | | savings by doing nothing after receiving the funds |
| indirect rollover, you must complete two | | | | in a check made out to your name. Take the |
| requirements. First, you must invest the entire | | | | time to consider how you will transfer your |
| amount of your distribution funds including the | | | | company 401k retirement plan prior to making a |
| 20% that was originally withheld, into another | | | | move. The amount of money you could |
| qualified retirement plan. Secondly, this investment | | | | potentially lose by making the wrong choice could |
| must take place within 60 days of receiving your | | | | be detrimental. |