What’s the difference between a distribution and a rollover?

The difference is what you do with the money within 60 days after it leaves the plan—and its tax consequences.

  1. If you do not deposit the money into another 401(k) plan or an IRA, it is a distribution and is taxable.
  2. If within 60 days you deposit it into another 401(k) plan or an IRA, it is a rollover and not taxable—nor subject to a 10% penalty.

Are taxes withheld when money is withdrawn from my plan?

  1. The plan will withhold a mandatory 20% Federal tax withholding of any money leaving the plan.
  2. Depending on your state of residency, state taxes must also be withheld if you do not give instruction to the contrary.
  3. You can ask that higher percentage of Federal and state taxes be withheld.

Can I avoid the mandatory tax withholdings?

  1. Only if you instruct your plan to send your account balance directly to your IRA or the 401(k) plan of your new employer. This is called a “trustee-to-trustee transfer”.
  2. If you are intending to rollover your account balance, it is best to have it happen via the trustee-to-trustee transfer.
  3. If not, when you do deposit your account balance into that IRA or new 401(k) plan, you won’t have the amount of federal and state withholdings to deposit unless you have other sources of funds. Thus you may inadvertently receive taxable income and a tax penalty.

Can I rollover money from another plan or IRA into my current 401(k) plan?

  1. Only if the new plan agrees to accept a rollover. Plans are not required to accept them.
  2. You cannot under any circumstances rollover Roth IRA balances into a 401(k) plan.
  3. The IRS does permit you to rollover Roth 401(k) balances from one 401(k) plan to another.