Rolling over a 401k plan is normally done when you retire, though you might also decide to do it when you change jobs. The money in your plan is moved from your existing plan to another 401k or to an IRA. Moving the entire account is standard procedure. But, what if you want to move just some of it?
A rollover may be direct or indirect. A direct rollover is a rollover where the plan administrator moves the money for you. This may be done at any time after you retire. An indirect rollover means that you take receipt of the money. You must open a new retirement account and deposit the money into the new account within 60 days of closing the old account. In both cases, you may move only part of the money if you want. You don't need to rollover the entire 401k. If you're moving just part of the money with an indirect rollover, the 60 days starts when you withdraw the money from the account.
Because you can move just part of the money from your 401k, you get the benefit of flexibility. If there is an investment you really want to take advantage of, but do not want to commit all of your 401k funds, then you can do so. While consolidating retirement funds may be right for some people, you may feel more comfortable diversifying your retirement holdings. This allows you the ability to do that too.
When you do a direct rollover, there are no consequences. You may perform as many direct rollovers within a 12 month period as you want. This, however, does not apply to indirect rollovers. Indirect rollovers are limited to once per 12 months from the same account. Additionally, if you fail to perform the rollover within 60 days, then the full amount is treated as a distribution subject to ordinary income tax and a penalty of 10 percent on the amount distributed if it qualifies as an early withdrawal.
If you are considering moving your money out of your 401k, use a direct rollover. The indirect rollover is more complex and limits your ability to make future tax-free rollovers within the same year. This is especially important with partial rollovers, as you might change your mind and decide to rollover the entire account, or a larger portion, in the same year. Unless you have a need to have the money in your possession for 60 days, an indirect rollover unnecessarily exposes you to the risk of incurring a penalty and income tax on your retirement savings.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007