You can also
roll over
your
401(k)
assets indirectly, which gives you temporary use of the money but puts more pressure on you to complete the process than a direct rollover. This is how it works:
1.
You request a check for the amount of your 401(k) account from your former employer's plan. Twenty percent will be withheld.
2.
Once you receive the check, you have 60 days to deposit the amount of the check into a new employer's plan or an IRA.
3.
If you complete the rollover within the time limit, you'll be able to continue investing the money for retirement, tax deferred.
4.
You have the right to add to the deposit some or all of the amount that was withheld to prepay taxes, keeping that amount tax deferred as well.
An indirect rollover may be useful if you need the cash as a short-term loan, but only if you'll have the money back in time to make the deposit. For example, you may need cash to close the sale of a new house while you're in the middle of closing the sale of your old one. However, if you don't complete the transaction within 60 days, the check is treated as a cash distribution by the IRS. You'll owe income taxes and a 10% penalty if you're younger than 59 1/2.
If you also deposit some or all of the 20% your employer withheld by tapping your savings or other sources, you'll receive a refund for the amount that was withheld when you file your taxes for the year. But any money that isn't deposited will be considered a cash distribution, subject to tax and potential penalty. Plus, you won't be able to reinvest it later in a tax-deferred retirement plan.
You can only do one tax-free, penalty-free indirect rollover into an IRA per calendar year. However, you can do as many direct rollovers as you like.
You can avoid the 20% withholding but still have temporary use of the cash in a two-step process. First, arrange for a direct rollover into an IRA. After that's done, arrange an indirect rollover to another IRA, giving you use of the money for 60 days.
