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One common
complaint we hear from readers is how long and complicated the
process of withdrawing or rolling money out of their 401k plan
can be, especially when compared to making an IRA rollover or
withdrawal.
Their observations
are right on the mark — 401k withdrawals and rollovers are
more intricate than with IRAs. That's because the 401k rules
were deliberately designed to make it more difficult for anyone to
access your money, including creditors. That's true whether the
creditors are yours or your employer's.
While there isn't any magic bullet
to make a 401k withdrawal or rollover go more quickly,
understanding the rules about how they work will help you develop
a strategy to make your rollover as smooth as possible.
Asset Ownership
Differences
Rollover procedures are different
because assets are held differently in a 401k plan than in an
IRA. "The money you have in a 401k is held in a trust for
your benefit," said Ted Benna, the creator of the first
401k plan and president of the 401k Association. "With an
IRA, the ownership resides with you."
Indeed, IRA assets are your
property and you can direct your IRA custodian to maneuver your
assets as you wish. Typically, all that's required is your
signature to authorize a change in investments, or to make an
account withdrawal or rollover.
Because your employer
sponsors the 401k plan, the assets are not actually your
property, but instead are owned by the plan. Federal law requires
that your contributions be held in a trust and administered by a
trustee, who is charged with managing the assets on your behalf.
The trust holds your 401k money
apart from your employer's general assets. That means, for
example, that your employer can't use them as collateral for a
business loan and the money can't be seized by creditors if your
employer goes bankrupt
The drawback to these protections
is that there has to be an additional level of administrative
oversight. That's why 401k money is tougher to get than IRA
money.
The Withdrawal
In order to get your money from
your 401k plan for a rollover, you need to have "a benefit
event," as it is known in the human resources industry. That
usually means you retire, reach age 59½, or otherwise leave your
job.
When the benefit event occurs,
you'll need to tell your employer how much you are taking and
where you want the money to go by filling out a 401k-election
form. Common options include lump-sum distributions, regular
periodic distributions or rolling the money to another 401k plan
or an IRA.
After submitting this paperwork to
your employer, it's processed and a formal notification is made to
the plan trustee (often a high official at your firm) that a
distribution can be made. The trustee, in turn, forwards the
distribution notice to the firm that administers the plan.
"Before we can release the
money, we must receive notification from the employer (or
trustee)," said Dean Schmitz, assistant manager of sales with
Principal Connection, a business unit of the Principal Financial
Group.
At a minimum you should expect a
401k withdrawal to take two or three weeks regardless of where
the money will end up, industry experts say.
A slow rollover tends to be the
exception rather than the rule, said George Diones, vice president
of the client management group with Diversified Investment
Advisors. After all, many employers are as eager to give you your
money as you are to remove it from their plan, he added. One
common reason employers want you to close your account after
leaving is to reduce the administrative expenses the plan pays.
With an IRA rollover, you only need
to notify your custodian that you are making a withdrawal or
rollover. And sometimes (as explained below) you don't even need
to do that.
Rollover
Comparison
There are two ways to move money from
one 401k to another or to an IRA. Either the money moves via a
direct transfer or the money is sent to you and you move the money
to the new account. For this example, let's assume that you're
using the direct transfer method. In other words, the money moves
directly from an IRA to an IRA or a 401k to an IRA, without you
touching it.
This process is known as a direct
rollover or trustee-to-trustee transfer. When you move your money
this way, you never have to worry about the tax consequences of
your transfer.
We will take a look at two basic
transactions, moving money out of a 401k to some other tax
protected account such as an IRA or another tax-qualified plan
such as another 401k, and moving money between IRAs.
If you've ever made an IRA-to-IRA
rollover, you know that the process is relatively simple.
Actually, your new IRA custodian will often take care of the
entire transaction for you. You fill out a form giving the
custodian permission to transfer the assets from your old IRA, and
the money is usually moved within a week or two.
That's half as much paperwork as
you'll have to do for a 401k rollover. For those, you need to
fill out an election form with your old employer and then fill out
another set of paperwork with the firm accepting your rollover.
You should expect your 401k rollover to take a minimum of two
weeks and possibly three. Currently, it takes the Principal two
weeks to process a 401k payment once it receives the paperwork
from the employer, Schmitz said.
Some 401k-plan providers will
help you set up an IRA with their company, because they want to
keep your money invested in their funds. They will also help you
fill out the 401k to IRA rollover paperwork. This may not be a
bad strategy if you like the investment options currently
available to you.
Smooth Rollover
Strategies
One key to a smooth and timely
401k or IRA rollover is filling out all the paperwork correctly
and completely.
"The participant has the
responsibility to read the papers and check them off," said
Trisha Brambley, president of Resources for Retirement Plans Inc.
"If you mess up, the former employer will issue you a check
... and then it's a big mess."
Make sure you have a new IRA
account set up to receive your money or a new 401k open at your
new employer before you initiate the rollover. This way, you'll
know the appropriate account numbers and addresses to receive your
money.
With a 401k rollover, be sure you
have correctly filled out the election form. If you are rolling
your money to an IRA, include the new IRA account number and
custodian's address.
With a rollover to a new 401k
plan, check to see if your new plan accepts rollovers (not all
plans do) and then make sure you have the correct information
about the trustee who will accept your money.
Another way to ensure a smooth
rollover is to make a trustee-to-trustee transfer. That way, the
money goes directly from one tax-deferred account to another and
there are no potential tax consequences for you.
In the unlikely event that the
money is sent directly to you, you will have a 60-day period in
which to place the money in a new tax-deferred account. If you
don't, the IRS will assume that you have permanently withdrawn
your money and you will owe an early withdrawal penalty and taxes
on the distribution. The penalty will apply only if you are
younger than 59½. 
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