Have you recently changed jobs? You may want to roll over funds in your former employer’s 401(k) plan to an IRA. But there’s a tax trap for the unwary. You can avoid it by arranging for a direct trustee-to-trustee transfer from the plan to your IRA. Why a direct transfer? If you receive 401(k) funds in a check or electronic transfer that’s payable to you, your employer must withhold 20% of the taxable amount for federal tax. Then, you have 60 days to come up with the missing 20% and get it into your IRA. Otherwise, it’s not a tax-free rollover. In that case, you’ll owe income tax on the 20%, and if you’re under age 59½, you may also owe a 10% early withdrawal penalty. Questions? Contact us.
Our Blog 