Mistakes With A 401k Rollover
posted in Bricks and Mortar Business |A 401k rollover is a common occurrence when employees leave their company to work at a different place, to start their own business, or for any reason other than retirement (though it could happen during retirement as well). What it means is that instead of cashing out their 401k and taking the money and incurring taxes, (plus if they are younger than fifty-nine and a half a ten percent penalty will be imposed) people can move their funds into a different retirement account and continue saving without any losses.
It sounds simple, but “rolling over” a 401k can still go wrong if a few rules aren’t followed. One main rule is the same property rule, which prevents people from trying to make other income non-taxable. Basically, the money that you move has to be the same money in the account. You cannot, for example, take the money in your 401k account, purchase some other assets with those funds, and then deposit the money that is left into the new account. That purchase money will result in the ten percent penalty for an early withdrawal from your 401k.
There are time restrictions as well when doing a 401k rollover. You are only allowed to rollover funds from one account to another once a year. So if you did a rollover in one year, then no other rollovers could occur with the account that you transferred from, nor could any occur with the account that you transferred to. Both accounts would have a one year limit imposed upon them. If you had a second account that was an IRA, then you could still do a rollover with that account, as long as it was into a different account from the previous pair.
There is another time rule with 401k rollovers. This one is called the 60 day rule and it means that after receiving funds from your IRA, you have to rollover the money to another IRA. This rollover is not counted with the above one year rule. If you don’t do this, then not only is the income treated as ordinary and taxable income, but you will also be considered to have withdrawn the funds and have to pay the ten percent penalty if you are younger than fifty-nine and a half.
The 401k rollover is an important part of protecting your funds when you change jobs or want to have more control of where your money is invested. That being said, simple mistakes with this process can be quite costly financially so if you are not experienced with 401k rules then you should consult with someone who has experience in this area. Obtaining professional 401k advice will avoid a lot of potential problems and can save you both money and time.
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