A handful of IRS rules govern every 401k rollover. Knowing them keeps your transfer tax-free.
What are the main 401k rollover rules?
First, a direct rollover from a traditional 401k to a traditional IRA is tax-free and has no deadline. Second, an indirect rollover must be redeposited within 60 days, and the plan withholds 20% for taxes. Third, you may do only one indirect IRA-to-IRA rollover per 12-month period, though direct rollovers are unlimited. Fourth, rolling pre-tax money into a Roth IRA is a taxable conversion. Fifth, withdrawals before age 59 1/2 outside a proper rollover can trigger a 10% penalty. Following these rules keeps your money tax-deferred. For help, call 1-800-MEDIGAP at 1-800-633-4427.
Special rules for after-tax and Roth funds
If your 401k holds Roth contributions, those roll into a Roth IRA tax-free. After-tax (non-Roth) contributions can often be rolled to a Roth IRA while the associated earnings go to a traditional IRA, a strategy sometimes called a split rollover. Company stock held in a 401k may qualify for special net unrealized appreciation (NUA) tax treatment, which can be lost if rolled into an IRA. These situations are nuanced, so confirm details with a tax professional before acting to avoid an unexpected bill.