A properly done rollover never triggers a penalty. Here is how to keep it that way.
How do you roll over a 401k without penalty?
Use a direct, trustee-to-trustee rollover. Because the money moves straight from your 401k to your IRA and never reaches you, the IRS does not treat it as a withdrawal, so there is no 10% early-withdrawal penalty and no income tax. The transfer simply continues your tax-deferred savings. Penalties only appear when money actually leaves the retirement system, for example if you cash out instead of rolling over, or if you miss the 60-day deadline on an indirect rollover. Stick with a direct rollover and you stay penalty-free. For help, call 1-800-MEDIGAP at 1-800-633-4427.
What triggers a penalty, and how to avoid it
A 10% early-withdrawal penalty generally applies when you take money out of a 401k or IRA before age 59 1/2 outside a valid rollover. The most common mistakes are cashing out a 401k at job change, or doing an indirect rollover and failing to redeposit the full amount, including the withheld 20%, within 60 days. To avoid penalties: always choose a direct rollover, never spend the funds, and confirm the transfer completed. If you are over 59 1/2, the early-withdrawal penalty no longer applies, but taxes on actual withdrawals still do.