How Long Do I Have to Reinvest After Closing a 401(K)?

by Mark Kennan, Demand Media
    A rollover to another qualified plan saves you on income taxes and penalties.

    A rollover to another qualified plan saves you on income taxes and penalties.

    If you've moved on to bigger and better jobs, or been forced to leave your old job, your old employer might require you to take your 401k money out of the plan. Instead of sacrificing all the hard work you put in to building up the tax-sheltered account by just withdrawing the money, consider rolling over the money into another retirement account. However, you've got to act fast because you've only got 60 days.

    Time Limit

    Once you receive the money from closing your old 401k plan, the clock starts ticking on your 60-day time limit to reinvest the money into another account. You can do whatever you want with the money for that time period as long as the money is deposited before the 60 days are up. However, unless you have some pressing need for the money and you're sure you'll be able to have the money redeposited before the rollover window is up, there's usually no reason not to roll it over immediately.

    Eligible Reinvestment Accounts

    You can't just put the money you take out of the 401k plan, put it back into the stock market and hope Uncle Sam won't mind. Instead, you've got to roll it into another qualified retirement plan, such as a 403(b), IRA or another 401k, in order to preserve the tax-deferred status of the money. For example, your new employer's plan might accept rollovers so you could move it there. Alternatively, if your new employer doesn't have a plan for you, you can put it in an IRA. If you don't move it into another qualified plan, it's considered a permanent distribution.

    Consequences of Not Rolling Over in Time

    If you don't reinvest the money in a qualified retirement account within 60 days, you're treated as taking the money out of the account forever. Practically speaking, it means you've got to pay income taxes on the money and, unless you're over 59 1/2 or an exception applies, the 10 percent additional tax penalty. Sorry, losing your job doesn't qualify. If later you try to put the money into an account, it's treated as two separate events: a distribution and a contribution. If the amount you try to put back in exceeds your annual contribution limit, you're stuck paying excess contribution penalties as well.

    Warning

    The amount you receive from closing your 401k is likely not the amount you should be rolling over. When you take a distribution from your 401k plan, the plan has to withhold 20 percent of the distribution for taxes. For example, if you take out $60,000, you're only going to get a check for $48,000. If you only roll over that $48,000, the IRS treats you as if you took a $12,000 distribution, subject to taxes and penalties. As long as you complete the rollover, you'll get the withholding back when you file your taxes.

    About the Author

    Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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