BACKGROUND: I may be interested in your 401k
business funding services; it appears to be a 'rollover business startup'
service.
But, I have
question regarding the setup process:
One of the
steps in your process is the transfer of retirement funds to the '401k
selfstarter' plan.
I currently
have an orphaned 401k that I was going to rollover into an IRA before the end
of the year.
I had read
that you can only rollover retirement funds between different types of
retirement accounts (401k, IRA, Roth IRA, etc) once per year.
QUESTION:
If I was interested if your rollover startup services within the next year,
should I hold off in rolling over my 401k account now? Or, isn't it a
concern (transfer vs rollover)?
ANSWER: The one per 12 month rollover rule
does not apply to 401k plans. However, I don’t suggest processing the movement
of 401k funds to an IRA via a rollover. Reason being, the 401k administrator
will withhold 20% for federal taxes and submit it to Uncle Sam. As a result,
you will only end up rolling over 80% of the 401k proceeds to an IRA. Instead,
it is best move the 401k funds to the IRA via a direct rollover. When a
distribution from a 401k is processed as a direct rollover, the check is made
payable in the name of the new IRA custodian for your IRA’s benefit and the check
is generally mailed to directly to the IRA custodian; therefore, the mandatory
20% federal tax withholding amount does not apply.
In sum, the one per 12 month rollover rule does
not apply to 401k plans and if you process a 401k direct rollover to the IRA,
you do not need to wait 12 months before subsequently processing an IRA rollover/direct
rollover to a 401k business funding retirement account. Visit IRS Publication 590 to learn more about the IRA rollover rules.
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