Watch Out For The 401k 60 Day Rule
With several options to transfer funds out of your existing 401k retirement account, it is difficult to know what you should do. Often the stress from the change that has necessitated the 401k transfer is enough for sleepless nights. When you couple in the decision to transfer your hard-earned retirement funds into a new account, the situation can be quite overwhelming.
Though the decision of where to transfer your funds in not simple to make, it is critical that explore your various options available to you. The first thing that you will want to do is consult with your tax advisor and/or financial planner.
Not only can a good financial planner steer you in the direction of which type of retirement account to transfer into (401k, Traditional IRA, Roth IRA, etc...), but they are also updated on the current tax laws regarding transfers.
The Internal Revenue service had complicated the rules for 401k rollovers, making the transfer rather daunting for the average investor. One of the more burdensome rules they have implemented is called the 60 day rule.
The 60 day transfer rule was designed to limit the amount of time that you have available to transfer the funds from one account to the other. The Revenue Service wants you to take care of the transaction and not leave the funds out in neverland. The primary reason is that they want you to decide how the tax treatment should be for the transfer.
Despite the simplicity of this rule, the tax implications of it are very present. The best way to avoid this penalty is to determine where the funds are going well before ever transferring them in the first place. A good advisor will help you get your ducks in a row before making the transfer. This allows you sufficient time to fill out everything that is required to move the funds.
You shouldn't make the assumption that the Internal Revenue Service will be forgiving with this rule. In fact, quite the opposite is true. Even cases involving only one or two days has incurred the penalty and been rejected appeals.
The only scenario in which the IRS may be somewhat lax on this rule is in the case of extreme circumstances or hardships. These circumstances are limited to cases such as death, incarceration, hospitalization, or disability. Though it is considered a compassion ruling to bypass the 60 day rule, the IRS does not provide a free pass to the taxpayer. Cases in which the compassion rule is applied will often see a fee for the waiver, dependent upon the size of the account transfer.
Roger Harrison is an experienced financial planning enthusiast that has extensively studied how to do a 401k ira rollover and the best ways to transfer your money. Visit him online at the The 401k Rollover Guru for more information on these and other related topics.
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