Rollovers for employee benefit plans

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

If you have ever been curious about rollovers for an employee benefit plan, then you have come to the right place. The following provides a simple overview of rollovers.

A rollover often refers to the transfer of money from one retirement plan to another without the burden of tax or penalties. Tax and or penalties can occur when people distribute their retirement plan money early, typically when they leave an employer for a new job. Participants have different options when considering what to do with their current investments in a 401(k) plan when they terminate employment. They could (1) roll the balance into an Individual Retirement Account (IRA), (2) keep the 401(k) with previous employer, (3), roll it into the new employer’s plan or (4) cash out.

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Rollovers are typically not taxed because they occur between accounts that are similar in nature, meaning people who have traditional 401(k) plans will rollover into another traditional 401(k) or IRA account. Similarly, those who are invested in Roth 401(k) plans will rollover into another Roth 401(k) or Roth IRA. A circumstance that is subject to tax would be when a participant chooses to rollover from a traditional account into a Roth account. This is due to the nature of the timing of taxes between those two accounts. Another situation that would trigger tax is when a participant personally receives funds from their retirement plan as an indirect rollover but fails to deposit those funds into another retirement plan within 60 days. When this happens, the IRS views it as an early withdrawal and the amount represents taxable income. If it is a Roth rollover, then only the investment earnings would represent taxable income. Additionally, if the participant is under 59 ½ they will owe an additional 10% penalty.

The steps taken to rollover funds are simple. First, you should decide where you want your money to go. There are a few differences to note between 401(k)s and IRAs. IRAs typically charge lower fees and they provide more investment options; however, an individual may only invest up to $6,000 annually. 401(k)s depend on your employer and what they offer, which is usually more limited than an IRA, but an individual may invest up to $19,500 (for the year 2021). Next, contact the necessary plan administrator or institution and ask what the procedure is to begin the rollover process. Typically, a direct rollover will be possible, meaning the funds get transferred directly from one account into the other. If you choose to receive an indirect rollover and personally receive the rollover check from your first plan, just keep in mind the 60-day rule!

Do you have any questions? Please don’t hesitate to contact a Henry+Horne professional to assist you.

Anh Dao