IRS 401k Rules
IRS rules, 401k regulations and rollover law can be confusing for
many investors. For many Americans, 401k regulations and IRS rules
are particularly important since the dollars they’ve accrued in
company-sponsored 401(k) retirement plans represent the largest
assets they own. If you have participated in a retirement
contribution plan for a number of years, your accumulations may
represent a significant source retirement income.
Most 401(k) plans provide an early withdrawal option when a “benefit
event - which typically means changing jobs, retirement, or electing
to receive money accumulated in a retirement plan by doing a 401k
It’s important to remember that some choices can come with
hefty tax penalties. Many individuals often fail to pay close
attention to the IRS 401k rules regarding the tax consequences of
In a typical 401(k) plan, individuals taking an early lump sum
distribution bear the automatic tax penalty which is 20% of the
payout. Investors familiar with the 401k rules and regulations and
with professional guidance may avoid all of these tax penalties by
conducting a correct 401k to IRA Rollover.
With regular withdrawals, because the payout is considered part of
your income, 20% of your earnings are withheld and allocated for
federal income taxes that you may owe on your earnings. If
withdrawing funds before age 59 , you may also be subject to a 10%
penalty. Further, you can also expect to pay 10% in taxes, in
addition to any income taxes paid on the lump sum.
There are steps you can take to protect your distributions from your
company’s retirement account from tax penalties. Establishing an IRA
helps ensure that you keep all your retirement plan contributions
intact, because no taxes are withheld from your contributions. You
can transfer any amount to a rollover IRA, and choose a variety of
investment options for your dollars, once the account is in place.
The ideal way to do this is known as a “trustee to trustee
transfer meaning that the funds are deposited directly into your IRA
account from your former employer plan or other retirement account.
If changing jobs or retiring your former company may require you to
transfer your retirement funds or you may decide that you wish to
have the added control over your plan by rolling it into your own
Consider the option of creating a direct rollover IRA within 30 days
of your last day of work. In many cases, your previous employer will
be able to write your distribution check for deposit into your new
IRA, by using a direct rollover. In a direct rollover, your former
employer makes the distribution check out in the name of the trustee
or the custodian of the IRA you’re designating to receive the
rollover funds. Otherwise, if the company makes the check out to
you, 20% will be withheld for taxes and you will have 60 days to
deposit into a new qualified retirement account and then request a
refund when you file your income taxes..
A 2001 IRS rule provides a “second chance for individuals who may
have missed the 60-day rollover deadline. It may be possible to get
a rollover extension by requesting a "private-letter ruling" from
In almost all cases it is ideal for investors to do a trustee to
trustee or direct transfer.
Rollover contributions and earnings are taxed as ordinary income when
withdrawn after age 59 , and, as mentioned earlier, withdrawals before
the age 59 are taxable and subject to a 10% penalty. To avoid penalties
for withdrawing funds “too late , withdrawals must begin by age 70 ,
these are called RMDs or Required Mandatory Distributions.
New retirement plan portability rules allow individuals to
consolidate their retirement funds into a single IRA. This option
works well if you are retiring or just changing jobs. New rules
allow 401(k) plans to be rolled over into a rollover IRA, and now
also include 403(b), 401(k) or 457 plans. If you have retirement
funds at various companies, it may be a good idea to simplify your
recordkeeping by combining them into one traditional IRA.
Atlantic Financial can assist you in consolidating your various IRA
and other retirement accounts and in selecting investments and
helping you monitor them on an ongoing basis.
Since 1994, Atlantic Financial has been helping individuals roll
over 401k plans into IRA accounts. Our full range of integrated
financial, estate planning and tax services can accommodate the most
discriminating investors while our personalized education-driven
approach appeals to investors in need of active advice and service.
Want to see what Atlantic Financial can offer your company
through a Fidelity Advisor 401k Plan?
Click this PDF document
If you would like us to assist you with your corporate 401k plan
or answer any questions you may have, please
email us (please be sure to include your name and phone number
in your email), or contact us
Sources and Disclosures
Source: Mutual of Omaha Companies
- October 6th, 2000
The telephone survey, completed in May 2000, of people
participating in company sponsored 401k plans has a margin of error
of plus or minus 5.5 percentage points at a 95% confidence level.
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