Hi! I recently rolled my old 401k into my new 401k, but there were a few issues/concerns that came up at the new 401k and I'd feel more comfortable rolling the funds into an IRA elsewhere. I spoke to the new 401k and they have cashed the rollover check so they said they could initiate another rollover into the IRA account (that I am in the process of opening), but I want to make sure there are no penalties/repercussions associated with this. Help!
-Emma, CT
Hello Emma,
Thank you for submitting your question regarding your 401(k) rollover to our blog. You asked whether you could rollover part of your 401(k) into an IRA after you had already moved this part of the 401(k) into another 401(k) (presumably with a new employer). We’re assuming that the rollover from the old 401(k) plan to the new 401(k) plan was permitted by the new plan. Because of some concerns regarding your new 401(k), you now want to move those funds into an IRA account.
The good news is that this is entirely permissible without penalty, provided you take a few simple precautions. You mentioned that the new 401(k) plan had “cashed the rollover check.” If you took an actual distribution and received the check yourself, then gave that check to the new 401(k)’s trustee, it would be considered an indirect rollover. Indirect rollovers have no taxes or penalties due, providing that the rollover to the new plan is completed within 60 days from the date of the distribution. For example, if you take your distribution on June 30, you have until August 29 to complete the rollover.
And it gets better – indirect rollovers from a 401(k) plan can be done in stages. In other words, you can move the money from your old 401(k) plan to another eligible retirement plan in one check or in multiple checks, as long as they are all deposited into a new qualified retirement account within 60 days. This is permitted under the income tax regulations (Treasury Regulation §1.402(c)-2(a)(1)(iv)). This is different from the rules for doing an indirect rollover of an IRA account to another IRA account, where you can only do one indirect rollover per year (you can read more about that here).
A better way to move money from one eligible retirement plan to another is using a direct rollover. In a direct rollover, you never take physical possession of the funds yourself. Instead, the trustee of the old plan sends the money directly to the trustee of the new plan. When you do a direct rollover, you can move money around as often as you would like during the year. This includes IRA accounts, which can do unlimited direct rollovers. And having the money transferred electronically in this manner means you don’t risk misplacing or losing a physical check.
Another advantage of a direct rollover, especially when it comes to IRA accounts, is that the trustee is not required to do withholding on the transfer, which they may insist on with an indirect rollover. Because the trustee does not know what you will actually do with the check when you do an indirect rollover, they are also required to issue a Form 1099-R so that the IRS knows you moved the money. It then becomes incumbent on you to report the rollover on your tax return for the year. You also need to inform the trustee of the account receiving the rollover that it is a rollover contribution so it can be reported by the new trustee to the IRS as such when they issue your Form 5498 for the year. That way, the IRS can verify the money was actually rolled over to a qualified account rather than spent on something else.
So yes, you can move the money you transferred to your new 401(k) to a new IRA account, provided the trustee of your new 401(k) is agreeable to it. We would definitely recommend that you ask them to transfer the funds directly to the new trustee of the IRA account, so you don’t need to worry about the 60-day time limit, but if that is not possible to do for some reason, make sure you get the money into the new IRA within the required time frame. Be aware that the trustee of your new 401(k) may still be required to report the distribution from the new 401(k) to the IRS on Form 1099-R, but it should indicate that it is a rollover if you do a direct rollover (the distribution code will be “G” rather than “1” or “2”). So, make sure you check with them about any reporting forms they may be issuing so you can prepare your 2023 tax return correctly.
While the IRS does relieve taxpayers of the early distribution penalty for failing to meet the 60-day deadline if it cannot be met due to circumstances beyond their control, such as a bank error on the part of the receiving bank, it’s better to do a direct rollover and avoid the hassle of proving to the IRS that you qualify for penalty relief.
We hope this answers your question, and happy rolling!
Sincerely,
Carolyn Richardson, EA, MBA