401k Rollover – Taxed Or Not Taxed? That Is The Question
Well, the answer is taxed at some point. The money you contribute and your employer contributes to your 401k is with pre-taxed dollars, so at some point you know the IRS is going to want their portion of your money. The question is, will they tax you when you rollover your 401k. The answer is: it depends.
If you want to avoid paying taxes now, you will want to move your funds from one 401k account to another by performing a direct rollover. This means you do not see the money and your previous and new retirement accounts will take care of the transaction for you. Of course there will be paperwork involved on your end. Don’t think it’s going to be that easy! If you directly rollover your funds you will avoid any taxes and penalties.
Should you decide to have your previous employer write you a check for your current 401k balance and you want to personally deposit this check into a new 401k account, you will be hit with a few taxes and potential penalties. The first tax you will see will be the 20% mandatory federal income withholding tax. Your current retirement company will automatically take out 20% and give you a check for 80%. You have 60 days to pay all of this money back. Should you miss the 60 day deadline you may also incur a 10% penalty because you withdrew your retirement funds early. The state and federal governments will treat your cash in hand retirement check as income. That is why it is so important to redeposit it within the 60 days, or more importantly, not touch it at all and let the two companies handle the transaction.
There is nothing worse than throwing money away and if you do not handle your401k rollover properly you will be throwing money away. Taking money from your retirement fund before your ready to retire defeats the purpose, so to stop you from temptation keep in mind that you will be taxed!
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