How to Rollover a 401(K) to an IRA To Avoid Owing Tax

by Kimberlee Leonard ; Updated July 27, 2017

A 401k is an employer-sponsored retirement savings account. When employment terminates, the employee has the ability to rollover the 401k plan into a self-directed Individual Retirement Savings (IRA) account to continue the tax-deferred growth on assets in the account. There are two types of rollovers that exists, a direct rollover and indirect rollover. An indirect rollover involves the sending of a check directly to the 401k owner with 20 percent automatically withheld for federal taxes. A direct rollover may take more time, but avoids the automatic withholding and ensure a 100 percent tax-free transfer.

Step 1

Request a rollover package from your 401k plan administrator. Call the number on the statement, explaining that you are no longer employed with the company and seek to conduct a direct rollover. The administrator will need to confirm employment status and will then send you the appropriate paperwork.

Step 2

Open a rollover IRA. The IRS allows many types of IRA investments, thus there are many different IRA custodians including banks, brokerage firms and insurance companies. Choose one that meets your investment needs.

Step 3

Complete all required rollover paperwork with your 401k administrator. Be careful to check the box stating "direct rollover" to ensure you don't get a check with automatic tax withholding. Complete the direct rollover section with the IRA information: custodian name, account number, address and designated investments.

Step 4

Sign and submit the paperwork with the 401k administrator. Notify the IRA custodian that the paperwork is submitted and allow three to six weeks for the direct rollover to complete.

Tips

  • Indirect rollovers allow 60 days to deposit the rollover check plus the 20 percent withheld for taxes. If 100 percent is re-deposited into an IRA before the sixtieth day, you will get the 20 percent back when you file your taxes.

About the Author

With more than 15 years of professional writing experience, Kimberlee finds it fun to take technical mumbo-jumbo and make it fun! Her first career was in financial services and insurance.