Benefits

• 401(k) accounts tie an employee to a specific employer. If an employee loses or changes their job multiple times, they may have multiple 401(k) accounts by the time they retire. With a 401(k) rollover, employees can switch to a single IRA, which allows these individuals to hold all of their retirement savings in a single account.
  
  

Time Frame

• According to the IRS, employees who roll over their 401(k) plan only have 60 days to move this money into a new account without penalty. The IRS requires the employer or firm managing the plan to withhold 20 percent of the plan's total sum. This amount helps cover tax obligations in the event that the employee does not convert the plan soon enough. If the employee wants to defer this 20 percent penalty, he will have to add 20 percent of the fund's value from his own pocket. The amount withheld by the IRS will be returned to the employee in the following tax year.
  
  

Considerations

• In order to avoid the 60-day window, some employees choose to have their entire 401(k) monies and investments transferred directly to another IRS eligible plan. With this method, the IRS does not require any tax monies withheld.
  
  

Reporting

• If an individual switches from a 401(k) plan to an IRA, she must report the transaction on IRS Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans). Reporting a rollover does not incur a tax obligation as long as all 401(k) distributions go directly into another retirement plan. The IRS requires the taxpayer to file the form by April 31 following the year in which the rollover took place.
  
  

Penalty

• If an individual chooses not to rollover the entire 401(k) distribution but decides to keep some of the money for personal use, he will pay regular income tax rates on this income, in addition to a penalty of 10 percent if he is under the age of 59 1/2 years. The same penalty applies when transferring money from a 401(k) into a non-IRS approved retirement plan or when the taxpayer misses the 60-day transfer window.