A rollover is a way to avoid taxes on a transfer between two qualified retirement plans. If you work for a company that offers a 401k plan, you may be able to transfer the funds to an Individual Retirement Account tax-free. Some exceptions exist, such as if you have a Roth 401k, in which case you can only roll your funds into a Roth IRA, not a traditional IRA. While most 401k to IRA rollovers are tax-exempt, the IRS may withhold 20 percent of your rollover if you take a physical distribution rather than transferring the funds electronically.
Step 1
Contact your 401k administrator. Ask what steps are necessary to perform a rollover to an IRA. Since rollovers from 401k plans to IRAs are fairly common, your 401k administrator should be able to provide you with a prompt answer to your request. Typically, you will have to file additional paperwork to complete your request.
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Step 2
Get a copy of your firm's rollover distribution form. Since 401k plans are pre-tax investment vehicles, any distributions are typically taxable. To prevent taxation on your rollover, you must indicate that you are transferring your funds to your IRA, which is another type of pre-tax investment account.
Step 3
Choose your distribution method. You can either withdraw a check from your 401k or ask for a direct rollover to your IRA via electronic means. If you accept a physical check, you are subject to the 20 percent mandatory withholding rule, even if you later roll that money into your IRA. With direct rollovers, there is usually no withholding.
Step 4
Complete your rollover within 60 days. If you roll over your funds electronically, you usually do not have to worry about this rule. However, if you take a physical check from your 401k, you must deposit that money in an IRA or other tax-deferred account within 60 days. If you fail to meet this deadline, the IRS will tax your withdrawal as a distribution rather than a rollover. You will owe ordinary income tax on the total amount you took out, along with an additional 10 percent penalty if you are less than 59 1/2 years old.
Step 5
Include Form 1099-R in your taxes. Even if your 401k to IRA rollover is not taxable, you will receive a Form 1099-R from your employer for the year you make the rollover. You must report the amount of your rollover when you file your taxes. Your tax filing form will allow you to indicate if any or all of the rollover should be considered non-taxable.
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