What Is The Penalty If You Don’t Rollover A 401k Plan?

When you are dealing with your 401k plan, there are many rules that must be followed. These rules apply to all aspects of 401k investing including withdrawals, rollovers, loans and contribution limits. It is crucial that you abide by these rules and regulations in order to avoid costly fees and penalties.

Don't Throw Money Away, Learn The Rules For A 401k Rollover

If you have been investing in your company’s 401k plan and your employment has been terminated for any reason, you can access the funds in your retirement account prior to turning 59½, but what you choose to do with it can greatly affect your present capital as well as your future financial nest egg.

Many people choose to roll over their 401k account to a traditional or Roth IRA, or into their new employer’s 401k plan. But what is the penalty if you don’t rollover a 401k plan? The IRS sets strict time limits on rollovers, so it is important to know what happens if you miss a deadline or decide to keep your funds out of a retirement account.

401K Withdrawal Rules

In order to make a withdrawal from your 401k you must meet certain conditions including age and employment requirements. There is also a minimum age where you must begin receiving distributions from your 401k plan.

If you retire or leave your job, become disabled, or you meet your plan’s hardship withdrawal requirements, then you will be allowed to make penalty-free withdrawals from your account. If you make a withdrawal under other circumstances, then you will incur a 10% penalty.

Keep in mind that the withdrawn funds will be subject to personal income tax rates, and if you elect to take a lump-sum distribution the IRS requires a 20% mandatory withholding from your funds. You may also choose, in lieu of a lump-sum withdrawal, to roll over you funds to an IRA or other retirement account.

When you reach the age of 70½ you are also required to take distributions from your 401k, or face penalties from the IRS. It is important to consult with your financial adviser prior to withdrawing any funds in order to avoid costly fees and penalties.

What Is The Penalty If You Don’t Rollover A 401k Plan?

If you decide to roll your 401k account over into a new retirement plan, it is important to be aware of the rules regarding these types of transactions as a mistake can cost you thousands of dollars in penalties. If you are rolling a 401k or an IRA into a traditional or Roth IRA at an online brokerage such as ETrade, the easiest thing you can do is initiate a direct rollover.

With a direct rollover the funds are transferred directly from your old financial institution to your new brokerage, eliminating the chance of an error or missed transfer deadline. If you have a check sent directly to you remember that you only have 60 calender days to redeposit the funds into your new retirement account.

What is the penalty if you don’t rollover a 401k plan? If you miss this deadline for any reason other than an error on the part of your financial institutions, then the entire amount withdrawn from the 401k account will be subject to both personal income taxes and an additional 10% early withdrawal penalty.

It is easy to see how these taxes and fees can quick add up and eat away at your capital. Carefully consider your options for withdrawing your funds, as well as reinvesting an a new retirement account.


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