You can reinvest your money back into your 401(k) plan after you cash out, but only for a limited period of time. If you don't act within that window of opportunity, the Internal Revenue Service usually won't make an exception to allow you to recontribute the money back into your 401(k).
No matter what you've done with the money while it was in your custody, you can put it back in your 401(k) -- or any other qualified retirement plan -- if it gets redeposited within 60 days from the date you took the money out. For example, if you took out $2,000 to pay off your high-interest credit card bill, but two weeks later received an end-of-year bonus and a big check from your grandparents for Christmas, you could use that money to reinvest in your 401(k).
In very limited circumstances, you're entitled to an automatic waiver of the 60-day time limit. To qualify, you're basically required to have done everything correctly and have a bank error be the only problem. If you had extreme circumstances such as being hospitalized, incarcerated or disabled, the IRS may grant a waiver allowing you to complete the rollover late. In considering a waiver, the IRS also looks at whether you used the money for other purposes, whether bank errors contributed to the late rollover and how much time has passed since the initial distribution.
When you take a 401(k) distribution for any reason, 20 percent gets withheld for federal income taxes so you don't receive the full amount. If you want to reinvest the full distribution back into the 401(k), you must come up with the extra 20 percent as well. Otherwise, whatever you don't reinvest counts as a permanent distribution. For example, supposed you take out $2,000. You receive a check for only $1,600 because $400 is withheld. If you redeposit only $1,600, that last $400 counts as a permanent distribution.
Completing a rollover of your 401(k) distribution helps you avoid the nasty tax consequences of an early 401(k) withdrawal. Early withdrawals count as taxable income and, unless a special exception applies, like hospital costs over 10 percent of your adjusted gross income or a permanent disability, you also owe a 10 percent additional tax penalty. However, when you roll over the money, you report the distribution on your return, but any portion (or all of it) that you roll over isn't counted as taxable income or hit with the penalty.
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