When you terminate employment from a company and become eligible for a distribution from a qualified retirement plan, you may choose to transfer your account balance to an individual retirement account (IRA) or another qualified retirement plan. When this occurs, the transfer is referred to as a rollover.
Below are answers to some of the most common questions asked by retirement plan participants about rollovers.
What Are the Benefits of Electing a Rollover?
The advantage of a rollover versus simply taking a distribution is that you get to avoid the mandatory 20% federal withholding, as well as applicable state taxes, and a possible 10% early distribution penalty (if the participant is under age 59 1/2).
How Do I Know if My Plan Provides for the Rollover Opportunity?
By law, all plans are required to permit former participants to elect to roll over distributions.
What Happens if I Also Have an Outstanding Participant Loan in my Former Employer’s Plan at the Time of Distribution?
Participant loans may not be rolled over to an IRA.
Sometimes (but not very commonly), you can roll over your participant loan to your new employer’s plan and continue making payments on the loan through payroll deduction with your new employer. For this to happen, the receiving plan must be willing to accept the rollover of your loan.
Finally, you have until your tax filing deadline (including extensions) to repay the loan into your IRA.
Example. Susie takes a distribution from the ABC Company 401(k) Plan on July 1, 2019, and chooses to roll her vested accrued balance to an IRA. At the time of her distribution, Susie owes $4,000 on her participant loan. Susie has until April 15, 2020 (or later, if her tax return is extended), to deposit $4,000 into an IRA. (She must retain the documentation of the payment). If she does this, she does not have to pay the taxes owed.
Does My New Employer’s Plan Have to Accept Rollover Contributions?
No. A plan is not required to accept rollover contributions. This is an election that is made by the Plan Sponsor when designing the plan. The plan may also limit rollovers to those from certain plan types, i.e., to only distributions received from some of these types of plans: 401(k) plans, 403(b) plans, 457 plans, or IRAs. You should check with your new employer or your new plan Summary Plan Description to determine whether rollover contributions are accepted and from what plan types.
If My New Employer’s Plan Accepts Rollovers, Are There Timing Restrictions?
Maybe. Some plans only allow rollover contributions after a newly hired employee completes the eligibility requirements. Some plans accept rollover contributions immediately. Check with your new employer or the new employer’s Summary Plan Description to determine if there are restrictions before requesting a distribution from your former employer.