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If you are switching from one job to another, and already have a 401k Plan with your old employer, there are 3 things which you shouldn’t do when you think of a 401k Rollover (transferring 401k money into an IRA account).

1. Go for a withdrawal:

This is something that most people do when they change jobs. Taking out cash from the 401k account, that too, when you’re under 55, will require you to pay taxes on the money withdrawn. Besides, there’s a tax penalty worth 10% of the distribution.

2. Simply forget about your old plan:

Your new employer may offer you a new 401k plan but this doesn’t mean that you don’t make use of the old plan. Your previous employer might change the 401k money investment options which might give you lower returns. Moreover, if your 401k balance is below $5000, then your employer won’t bother to remember it.

The best thing is to roll over your 401k money into an IRA. This is because the IRAs offer flexible investment and withdrawal options. However, if your balance in the old plan is below $1000, your employer will probably cash you out.

3. Request for a check to get your Plan Assets:

If you wish to roll over a 401k into an IRA, there are 60 days within which you need to complete it. Moreover, you won’t get the check for the entire balance on your account.

You’ll get only 80% of the plan money while the employer will use the remaining 20% to pay taxes (the 20% is refundable under circumstances) on the amount distributed to you via the check. So, if you wish to roll over $20,000, you’ll get the check for $16000. Therefore, you need to make up for $4000 and in just 2 months!

Otherwise, the entire amount will be taken as a taxable distribution. That is, you’ll have to pay taxes on the $20,000 apart from that on your usual taxable income. And, if you’re under 55 years, then there’s the extra 10% penalty!

The best way to handle this is to opt for a direct transfer of your 401k money into whichever IRA account you prefer. In this way, your 401k cash assets will flow directly into your IRA account and no cash from your account will be withheld to pay income tax.