Your Personal 401(k) Handbook |
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How to Transfer Your 401(k) Into Another Account
It used to be that when you quit the company, they simply handed you a check containing your total 401(k) savings -- minus a 20 percent withholding tax -- and you had 60 days to find a new tax-deferred place to invest it -- either an IRA or a 401(k) at your new job. But in 1992, Congress changed the law and now you may never have to lay a hand on any part of your 401(k) lucre when changing jobs. To take advantage of the "direct rollover" option, make sure that your old company's 401(k) trustee makes the check directly payable to your new company's 401(k) trustee. That way, you'll escape the taxes.
The Costly Alternative
Otherwise, if they put the check into your hands and you do not put the money into a tax-deferred vehicle such as an IRA or 401(k) within 60 days, you will be subject to a 10 percent tax penalty. The 20 percent that your old company gave to the IRS can be recovered only by filing a special petition to the IRS in the very next tax year. (Forms for this are available at your local IRS office.) If you fail to file for recovery, the money is lost.
Furthermore, you must also roll the missing 20 percent into your new IRA, or it will be considered withdrawn and taxed. You may have to pull this 20 percent from your own pocket in order to avoid the tax.
Get Advice
Confused? So are we. That's why it's usually best to go to your new company's benefits manager to rescue your old 401(k) money like floating cargo and pull it into your new ship.
The human resources department of the company you've just joined should have rollover forms on file, which will ask you to provide all the pertinent information on your old 401(k). That money will be blended into a new 401(k), which you can again begin feeding with regular paycheck deductions as soon as your new employers deem you eligible.
Or if you don't have a new job, go to your neighborhood broker or bank, open up an IRA and fill out the necessary rollover forms directly from the establishment.
Leave It Alone
Finally, you might consider simply leaving your old 401(k) money in place. Depending on your company's rules, you may be allowed to do this only if the account is worth $5,000 or more. Otherwise, you are mandated to roll it over within a certain period of time or withdraw it.
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