401K is a retirement benefit plan designed to safe money that can be withdrawn on reaching the stipulated maturity period. In other words, if you start saving early, you can build up a huge stock of cash that will make the after retirement days financially secure.
Now, the 401K also requires employer contribution. But, what happens when you switch companies? How to contribute to 401K in such case?
You take help of 401K rollover. Rollover is the process of shifting the funds into another investment program- either open an account in the new company or create an Individual Retirement Account. The transfers are usually tax free but ask the authorities if it is otherwise. According to new plans, one can directly transfer from 401K to Roth IRA during rollover. It gives the advantage of tax free distribution of funds.
Before opening a new account with 401K rollover, it is necessary to review the offer document closely for knowing if there are any restrictions imposed. This will decide whether you need another 401K account or explore other investment options. If you want IRA option, then fill out the IRS 1099- R form before leaving present employment and the transfer is completed within 60 days. After the 60 day period lapse, decide on opening account with another financial institution.
401K rollover generates higher amount of interest but they are temporary accounts. Sooner or later, create a new permanent 401K account or IRA account. For finally depositing amount into new IRA, complete the 5498 IRS form fully and submit with the authorities. However, if you choose not to create either 401K or IRA account, the amount can be withdrawn but there will be heavy taxes levied and 10 percent of the total amount charged and deducted as penalty for untimely withdrawal.