A 401k plan is a cornerstone of many people’s retirement savings plans — although there are 401k contribution limits and other plan rules, it’s still a great way to save for the golden years. If you’re not retiring, but simply changing jobs, you can take your 401k plan with you.
Follow the 401k rules and rolling over your nest egg into another qualified retirement plan can enable you to avoid taxes and potential early withdrawal penalties you would owe if you took a distribution. Here’s what you need to know about rolling over your 401k.
When 401k Rollovers Are Permitted
You can roll over most distributions from your 401k plan to another qualified retirement account, but you’re usually limited to taking distributions only after you’ve left the company, become permanently disabled or turn 59.5 years old.
Some 401k withdrawals, however, are ineligible for rollovers — regardless of how quickly you redeposit the money. These include required minimum distributions, 401k loans treated as distributions, hardship distributions, distributions of excess contributions and related earnings, and limited other distributions.
Explore: Benefits of a 401k Rollover
You Can Roll Over Only Vested Money
Some 401k plans have vesting requirements, which could mean your 401k balance isn’t completely yours to take with you if you leave — yet. Your contributions always belong to you 100 percent, but employer contributions might require you that work for the company for a certain period of time before they belong to you.
Employers use different methods to vest employees. One method is cliff vesting, which vests you 100 percent after three years. Another is graded vesting — you are vested for 20 percent of your employer’s contributions after two years and an additional 20 percent every year thereafter. For example, if you leave when you’re only 40 percent vested, you get to roll over all of your contributions and earnings, but only get to roll over 40 percent of the contributions and earnings from your employer.
Accounts That Accept 401k Rollovers
You can roll your traditional 401k plan balance into almost any other type of qualified retirement plan, including a traditional IRA, another 401k, SEP IRA, or a 403(b) or 457(b) plan. You can also roll it into a SIMPLE IRA if you’ve had it for at least two years.
You can also convert your traditional 401k into a Roth account by rolling it into either a Roth IRA, Roth 401k, Roth 403(b) or Roth 457(b). When you convert to a Roth account, however, you must include the rollover amount as taxable income for the year. But make sure your new account will accept your rollover because retirement plans aren’t required to accept rollover contributions.
How to Roll Over 401k Accounts
When you’ve decided that you want to roll over your retirement savings, you can use either a direct rollover or a 60-day rollover. Here’s how to do a direct rollover and how to do a 60-day rollover:
The most straightforward option for rolling over your 401k plan is a direct rollover. You simply have your 401k plan administrator deposit the money directly into the new plan, such as your new company’s 401k plan or an IRA. Because the money is going directly into the new retirement account, you won’t be hit with an income tax withholding.
If you choose a 60-day rollover, you’ll receive a distribution from your current 401k plan. You must deposit the distribution in another qualified retirement account before 60 days pass. The distribution, however, is subject to income tax withholding — a minimum of 20 percent at the federal level — so you won’t receive the full amount. Understand that if you don’t roll over the full amount, the amount you withhold will be treated as a permanent distribution.
For example, say you want to roll over $50,000. If you take a distribution, the administrator will hold at least $10,000 for federal income taxes. If, however, you roll over only $40,000, the other $10,000 will be treated as a permanent distribution.