Any bookkeeping, business or tax article contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor can it be used to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

Handle Your 401(k) Rollover With Care

Handle Your 401(k) Rollover With Care

Leaving a job? You may want to roll over funds in your former employer’s 401(k) plan to an IRA. But there’s a tax trap for the unwary. If you receive a 401(k) plan check that’s payable to you personally or if you have a distribution put into a personal account electronically, 20% of the taxable amount of the payout will be withheld for federal tax.

If that happens, you have 60 days to come up with the missing 20% and get it (along with the amount distributed to you) into your IRA. If by that deadline you transfer to your IRA only the amount distributed to you, you’ll owe income tax on the 20% withheld amount plus a 10% early withdrawal penalty if you’re under 59½. You can dodge this tax trap by arranging for a direct trustee-to-trustee transfer from the 401(k) plan to your IRA.

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