The 401(k) plan rules can be quite tedious and time-consuming for employers, so some companies opt to use what's known as a "safe harbor." In exchange for not having to worry about the annual testing, the company must make minimum contributions to each employee's 401(k) plan. For the purposes of rollovers, however, the Internal Revenue Service doesn't make a distinction between money in a safe harbor 401(k) plan and money in a general 401(k) plan.
Before you can roll over money from your 401(k) plan, you first need to be able to take your money out. If you're over 59 1/2, that's not a problem. But when you're younger, you can't take money out of a 401(k) plan unless you're permanently disabled, you've left the company or you have a financial hardship. What's more, hardship distributions aren't eligible to be rolled over. You also can't roll over loans or required minimum withdrawals.
After taking a distribution from your safe harbor 401(k), you have just 60 days to put the money in an IRA. For example, if you take a distribution on July 1, 2013, you must have the money deposited in the IRA on August 30, 2013. Missing the deadline means it counts as a permanent distribution, which means you can't complete the rollover and you owe income taxes plus, if you're under 59 1/2, a 10 percent early withdrawal penalty.
Using a rollover to move funds from a 401(k) plan to an IRA can be tricky because of the tax withholding requirement. The IRS mandates that your financial institution hold back 20 percent of your distribution, no matter how many times you promise you'll complete the rollover. That means you have to come up with the extra money out of your own pocket, and then wait to get it back later, as a tax refund. For example, say you're rolling over $42,000. That means $8,400 is withheld for taxes. If you only roll over the $33,600 you receive, that last $8,400 counts as a permanent distribution.
If you do complete the rollover as planned, you won't owe any taxes but you still have to report it on your taxes, which means you can't filing your tax return using Form 1040-EZ. On Form 1040, enter the amount of the distribution on line 16a, the amount you didn't roll over -- even if it's $0 -- on line 16b and "rollover" next to line 16b.For Form 1040A users, enter the amount of the distribution on line 12a, the amount you didn't roll over on line 12b and "rollover" next to line 12b.
- U.S. Department of Labor: 401(k) Plans for Small Business
- Internal Revenue Service: Rollover Chart
- Internal Revenue Service: Retirement Topics - Rollovers of Retirement Plan Distributions
- Internal Revenue Service: Publication 590 -- Individual Retirement Arrangements (IRAs)
- Internal Revenue Service: Form 1040 Instructions
- Internal Revenue Service: Form 1040A Instructions
- Comstock/Comstock/Getty Images