Indirect Rollover versus Direct Rollover
As you may know, there are different actions you can take with assets invested via a previous employer’s 401(k) plan. These include leaving the assets where they are, moving the assets to a new employer’s plan, cashing out, and rolling the assets over to an Individual Retirement Account (IRA). If you decide to pursue a rollover, consider the following information before you get started:
You can make a rollover at any age, but there are specific rules that must be followed. There are two possible ways that retirement funds can be rolled over: the 60-day (indirect) rollover and the trustee-to-trustee transfer (direct rollover).
The 60-day (indirect) Rollover
With this method, you actually receive a lump sum distribution from the employer-sponsored retirement plan. To complete the rollover transaction, you roll the plan assets to a new employer's plan (if applicable and permitted) or to an IRA. You must complete this transaction within 60 days.
If properly completed, rollovers (other than to a Roth IRA) are not subject to income tax. However, if you fail to complete the rollover, or miss the 60-day deadline, all or part of your distribution may be taxed and the taxable portion is subject to a 10 percent early distribution penalty (unless you’re age 59½ or if some other exception applies).
Furthermore, if you receive a lump sum distribution from an employer-sponsored retirement plan, the employer must withhold 20 percent of the payment for taxes. This means that if you want to roll over your entire distribution, you’ll need to come up with that extra 20 percent from other funds (though you may be able to recover the full amount when you file your tax return).
The Trustee-to-trustee Transfer (direct rollover)
The second type of rollover transaction occurs directly between the trustee or custodian of your former employer-sponsored retirement plan, and the trustee or custodian of your new employer's plan (if applicable and permitted) or to your IRA. Since you never actually receive the plan assets or have control of them, a trustee-to-trustee transfer is not treated as a taxable distribution. Trustee-to-trustee transfers avoid both the dangers of missing the 60-day deadline and, for employer-sponsored plans, the 20 percent withholding stipulation.
With employer-sponsored retirement plans, a trustee-to-trustee transfer is usually referred to as a direct rollover. If you receive a distribution from your former employer’s plan that’s eligible to be rolled over, your former employer must give you the option of making a direct rollover to either another employer-sponsored retirement plan or to an IRA.
A direct rollover is generally the safest, most efficient way to move retirement funds. Taking a distribution yourself and rolling it over may be an option if you are certain you can roll over the full amount within 60 days.
Discussing Your Options
If you would like to discuss your options regarding your account(s) with a previous employer’s retirement plan, PNC's investment professionals can help. They can speak with you about your goals and discuss the pros and cons of the various retirement plan distribution options available to you.
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Important Legal Disclosures and Information
If you have a 401(k) from a former job, you may have several options to consider; each may have different costs, payment options and other features. Consult your legal or tax advisor for more information.
This material is meant to educate and not to provide legal, tax, accounting or investment advice. PNC Investments and its affiliates and vendors do not provide legal, tax or accounting advice.
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