When you leave your job or retire, you may have a potentially large amount of money sitting in your 401k that needs to be dealt with. One option is to rollover the balance of your account into an individual retirement account or another type of tax-advantaged account. When you do this, you must abide by the rules of the process and in a timely manner.
Indirect 401k Rollovers
An option to consider when rolling over your funds is an indirect 401k rollover. With this process, you take the money out of your 401k with the intention of rolling it into another account. You then have 60 days to get the money into another retirement account. If you do not deposit the money within the 60 day window, as of April 2011, you must pay a 10 percent early distribution penalty and pay taxes on the money.
Direct 401k Rollovers
Another option to consider is a direct rollover. With a direct rollover, you do not actually take possession of the money, and you leave the process to your account providers. You must fill out a form with your 401k account holder to ask to transfer the money and close out your account. You also have to open an account with your new retirement account provider so that the money can be transferred. With this option, you do not have to worry about the 60 day window as it happens between the two parties.
One of the issues that must be considered during a 401k rollover is the withholding from your previous 401k holder. When you take the money through an indirect rollover, the 401k provider has to withhold 20 percent of your account balance for taxes. If you want to avoid the 10 percent penalty, you have to deposit the entire amount of your 401k account into the new account. This means you have to come up with 20 percent of the value of your account if you choose this method.
When you leave your employer, take time to evaluate your options when dealing with your 401k money. If you automatically take a distribution, you might be acting too quickly, which results in having to pay the 10 percent early distribution penalty. You may want to wait to see if you get a new job that offers a 401k. This way, you can roll the money over to the new account directly without having to take possession of it.