So the question is do you pay taxes on a 401k rollover? It depends on how you roll it over.  The rule of thumb is if you touch the money yourself, meaning you get a check from your retirement fund to deposit into a new account or you cash out completely, you are going to pay taxes.  If you transfer it from plan to plan, also known as a direct rollover, you will not be taxed.  They do this because if you have the cash in your hand, they treat it as new income.  Having cash in hand from your 401k defeats the purpose of a retirement plan and to deter you from cashing out early, they hit you with taxes and penalties.

If you take the money out of your previous employers retirement account you have 60 days to deposit that money into a new retirement account to avoid paying income taxes.  You will however be hit with an automatic 20% mandatory withholding for federal taxes which you want to pay back.  Whatever portion that you do not rollover will not only be hit with income tax, you could be subject to another 10% additional penalty due to early distribution. There are certain circumstances when this will not apply but essentially it means if you take the money prior to turning 59 ½ you may be liable for this 10% additional tax.

Whenever possible, you want to do a direct rollover to avoid paying a lot of money in taxes.  If you do decide to take a check and roll it over yourself, make sure you take care of it within 60 days. Remember, you have a retirement account for a reason.  You want to avoid dipping into this account unless necessary.  My next article will be about a few other 401k rollover questions, like what the exceptions are to the 10% additional penalty and when it’s ok to borrow from your 401k. The second part is going to be very short!

“I am currently enrolled in a 401k plan through my employer and I can’t remember if I had enrolled in this plan with my previous employers. How do I find out if I have any funds available to rollover to my current 401k plan?”

There are three easy ways to find out if you enrolled in your previous companies 401k plan.

Check your old pay-stubs. If you have your pay stubs from your previous employer you can see if there are any lines noting your deductions. This will at least let you know you were contributing.

Another way you would know is if you have ever or are still receiving a quarterly statement from your 401k plan. This statement would give you detailed information on how your 401k is performing and how much you have in your account. If you have never received one of these statements chances are you never enrolled, however you can never be too careful and so it may be best to move on to my third option.

Call your previous employer and ask them if they have that information on hand. Depending on the size of the employer they may have a specific person or department that handles this type of inquiry. Find out who you would need to contact, get their information and give them a call. They would be able to let you know if you ever enrolled and will be able to help with the rollover process if you have funds available.

If your previous employers 401k plan is producing well for you, you may be better off leaving it where it is. Find out if they are charging you any maintenance fee’s and also compare the investments of your previous employer to your current employer to find out where your money will work best for you!