Each Wednesday 401kBasics posts a new article in a weekly series called “Keep the Course”. This series is designed to give the average consumer information on how to keep their 401k plan on track! Your feedback or suggestions on future articles is welcome.
Over the next few weeks, 401kBasics will feature some of the most commonly asked questions.
”I’ve been told that if I withdraw money from my 401(k) plan, I have sixty days to roll it over and avoid taxes. Is this true?”
It’s partially true, allow me to explain. There are two types of rollovers, a direct rollover, and an indirect rollover, the latter of which is what you’re speaking of.
A direct rollover is where the check is made payable directly to the new company for your benefit. In this situation, the distribution is coded with a G on your 1099-R, which tells the IRS that you rolled the money over. With direct rollovers no taxes are taken up front or due when you file at year end.
The second scenario is an indirect rollover. Here, the check was made payable to you and there was a mandatory up front 20% federal withholding. Additionally, the 1099-R is coded as a taxable distribution and an early withdrawal penalty may apply, depending on your age and situation. However, if within 60 days you deposit the money in another qualified plan, or IRA then the penalty won’t apply and the taxes withheld (assuming you made them up) would be refunded to you at year end. Here, at year end you’ll be filing two tax forms–one reflecting the withdrawal and another reflecting the rollover. The tricky part with an indirect rollover is that you do have to make up the 20% federal taxes that were held up front.
This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.