Your 401(k) When Switching Jobs

Rollover into a Traditional IRA or Other Retirement Plan

The law provides some ways to delay paying taxes by allowing your 401(k) plan money to be rolled over into a traditional IRA or another company's retirement plan, e.g., a 401(k) plan. A rollover must generally be completed within 60 days of when the distribution was received. It is usually wise to roll over your distribution, because you are deferring taxes on your former 401(k) contributions and you continue to delay paying taxes on the amount it earns as well.

IMPORTANT NOTE: If you roll over your 401(k) funds to a traditional IRA, you may no longer be eligible for 10-year averaging unless you roll it into a conduit IRA (for taxpayers born before 1936).

SUGGESTION: From the year 2010 the income limitation on converting a traditional IRA to a ROTH IRA has been removed (even if you are married filing separately, provided you meet some conditions). You would be required to pay tax on any deductible contributions and any earnings on the date of the conversion. The 10% early distribution penalty does not apply on the conversion.

Direct Rollover to a Traditional IRA or Other Retirement Plan Avoids the 20% Withholding Tax

If you roll over your 401(k) distribution directly to a traditional IRA or other retirement plan, you pay no taxes on the money at that time, and you are not subject to the 20% withholding requirement. This can be accomplished by completing the appropriate plan documentation and establishing a qualified IRA account. You never touch the money or get involved with the transfer. This is called a "direct rollover."

Rollover into a Traditional IRA or Other Retirement Plan Even if the 20% Is Withheld

Even if you receive the 401(k) money directly and the 20% tax is withheld, you may still put the money in a traditional IRA or other retirement plan, generally within 60 days of receiving the 401(k) distribution. You can even put the full value of the 401(k) in the IRA or other retirement plan after 20% federal tax has been withheld, but you will need to have cash available equal to the 20% withholding amount.

For example, you have $60,000 in your 401(k) when you leave the company at age 35. None of the $60,000 is attributable to after-tax contributions, so all of it is subject to tax. You decide not to make a direct rollover and the 401(k) plan administrator mails you a check for $48,000, which represents the $60,000 that was in your account minus the 20% withheld for taxes. In order to roll over the full $60,000 to your IRA or other retirement plan, you have to have $12,000 available in cash. You can claim the 20% tax that was withheld on your tax return, and as long as you roll over the entire retirement distribution, the distribution won't be taxable. If you do not come up with the additional $12,000 and roll over only $48,000, you will have to pay income tax on $12,000 and, if applicable, the 10% early withdrawal penalty.

SUGGESTION: Elect a direct rollover from your 401(k) plan to a traditional IRA or other retirement plan to avoid the withholding rule.

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*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a Registered Broker-dealer (Member FINRA/SIPC) and SEC-registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. General Electric Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

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