401k rollovers

The most common situation involving a 401k rollover is when an individual changes employment and wishes to transfer their 401k plan assets into their new employers

plan.  The other common 401k rollover scenario is when the assets of a 401k plan are transferred into a traditional or Roth IRA plan. 

401k payroll deductions

The most common way to fund a 401k retirement plan set up by an employer is through regular, automatic payroll deductions. These deductions are normally set up

as a percentage of the employee’s salary and are often matched up to a certain percentage by the employer, adding funds to the employee’s own account.

401k Investment selection

Upon becoming eligible to contribute to the company sponsored 401k plan, employees receive information and a form that allows them to delegate how much of their salary they want to contribute. Then the employee can select what percentage of their contribution will go into what type of investment. Both the percentage allotted toward the 401k and the amount that goes into each type of investment can be changed periodically. This may be done to improve investment performance or to increase savings into more conservative investments as the employee approaches retirement.
 

Employer 401k rollovers are penalty-free

 Like traditional and Roth IRAs, one account is sufficient for all future contributions. This applies to company sponsored 401k plans since it is basically a government savings plan that is administered by the company and the investment brokerage firm they employ to manage the accounts for their company. If an employee changes jobs, the funds from one company’s 401k account can be transferred directly to another company’s 401k plan without any penalties.

Time your 401k rollover carefully to avoid penalties

If funds are withdrawn from one company’s 401k where a check is physically issued to the employee, then the employee must re-invest that money into the new employer’s 401k account within 60 days. Failure to do so will result in a 10 percent penalty and taxes will be due on the funds. It is important to know if the new company has a waiting period for contributing to their 401k plan before withdrawing funds from the old account. If the new employer requires the employee to be there for 90 days before beginning contributions, then those funds would be subject to the penalty and taxes. The best option is to leave the funds from the old employer’s 401k account until the new account is established. Then a rollover directly into the new account can be set up.

After-tax 401k rollover contributions

All 401k plans can also be funded from any other pre-tax account plan including traditional IRAs, governmental 457b, or 403b plans and vise versa. This makes it easier to keep funds with the investor no matter what type of job they move to or from. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 investors may also rollover some qualified post-tax retirement investments into their current 401k plan to help build savings more quickly. These after tax funds will not be taxed again upon withdrawal as the pre-tax contributions and earnings will.

401 rollovers are not necessary

Employees are not required to transfer or rollover funds from one 401k to another. If an employee leaves work altogether, for example to be a stay-at-home parent, then the funds can remain with the old employer’s 401k until retirement. In this situation, an employee may opt to rollover funds into an IRA. Here, there would not be a limit to the amount that can be put into the IRA in the form of a rollover.