Do I Reapply for a 401(k) Rollover?

Process

• A rollover generally refers to an indirect rollover, although the rollover could be a direct transfer of funds from one account to another. An indirect rollover is a process in which you are given the money from your existing retirement account. To complete the rollover, you must deposit this money into a new retirement account within 60 days of withdrawing money from the former account. Your employer withholds 20 percent of the amount being rolled over. You must deposit the rolled over amount plus the additional 20 percent withheld by your employer into the new account, and the withheld portion must be paid into the new account out of your own pocket. Your employer must send the withheld amount to the IRS. You get this money back when you file your tax return, assuming the rollover is completed within the 60-day time frame.
  
  

Significance

• If you fail to complete the rollover within 60 days, you are not eligible to receive a refund of the 20 percent withheld. Instead, the IRS treats this rollover as a distribution (withdrawal). The rollover, therefore, fails and you must pay a 10 percent penalty on the amount distributed if you are under age 59 1/2 in addition to ordinary income tax on the full distribution amount. You may apply for a second rollover; however, you must wait for at least 12 months prior to initiating another rollover, because you are restricted to one rollover per account per 12 months.
  
  

Alternative

• Consider doing a direct rollover -- also called a direct transfer or trustee-to-trustee transfer -- of your 401k plan funds. You are allowed unlimited direct transfers during the year from your 401k plan, and you don't receive the funds, so there is no withholding and no 60-day deposit rule. With a direct transfer, your 401k plan administrator and employer are responsible for making sure the funds are transferred directly to your new retirement account.
  
  

Benefit

• With a direct transfer, you eliminate the concern of depositing the funds into your new retirement plan within a certain time frame. You eliminate the potential for an IRS 10 percent penalty and income tax for a failed rollover. Because there is no limit on direct transfers, you may move money when it's convenient for you, instead of when the IRS allows it.