Employee Rollover Contributions
Employee Rollover
When you no longer work for a business or organization and have a retirement account with them, you are eligible to withdraw your account. You may choose to transfer your account balance to an individual retirement account (IRA) or another employer’s qualified plan if they allow it. When this occurs, the transfer is dubbed as a “rollover.”
What are the benefits of choosing a rollover?
The key advantage of a rollover as opposed to taking a cash distribution is that you get to avoid certain taxes and penalties. More specifically, by electing rollover you do not pay mandatory 20% federal withholding, applicable state taxes and a possible 10% early withdrawal penalty if you’re under age 59-1/2 (this 10% penalty goes away if you’re 59-1/2 and older).
If I have participant loan in my former employer’s plan at the time I take a withdrawal, what happens to the remaining loan balance?
This is not common, but you may be able to rollover your participant loan into your new employer’s plan and continue making payments on the loan through payroll deduction with your new employer. In order for this to occur, your current employer’s plan must accept the rollover of your plan.
Or you have until your personal tax filing deadline (including extensions) to repay the loan into your IRA. For example, let’s say you make a withdrawal from the Winterfell, Inc 401(k) Plan on Oct. 30, 2021, and choose to roll your account balance into an IRA. At the time of your distribution, you owe $8,000 on the loan. You have until April 15, 2022 (or later if you extend your tax return) to deposit the $8,000 into an IRA. If you pay back the loan timely, you do not have to pay the taxes owed. NOTE: You must retain the documentation of the payment.
Participant loans cannot be rolled over to an IRA.
Does my current employer’s plan have to accept rollover contributions?
No. A plan is not required to accept rollover contributions. You should review your new plan’s summary plan description or see HR to determine whether or not rollover contributions are accepted.
What steps do I need to take in order to rollover my account balance from my former employer’s plan to new employer’s plan?
There are a few steps involved here.
1. Review for rollover acceptance with your new employer: does your new employer’s plan even allow rollover contributions? Most plans do, but you will need to double check with your new employer’s HR or by reviewing the plan’s summary plan description.
2. Request rollover from your former employer’s plan: initiate a rollover request from your former employer’s plan by contacting the plan’s recordkeeper or HR. They will have you complete a rollover withdrawal form either by phone, online application or by completing a physical form. Here, you will indicate on the form where your rollover funds should be sent to. You will want to have it sent to you directly or to your current employer plan’s recordkeeper.
3. Deposit the money: once you receive the rollover check, deposit it into your new employer’s plan. If you requested the check be sent to your new employer plan’s recordkeeper, they will deposit it to your account.