401(k) woes, big time
June 26, 2006 6:15 PM   Subscribe

Having trouble with my 401(k) direct rollover... how screwed am I?

Here's the deal. As far as I know, I have to complete a 401(k) direct rollover within 60 days of requesting it. I requested it from previous employer: previous employer sent me the check and paperwork, made out to my current employer's plan. Current employer told me I needed to send A, B, and C with the check to ensure it was accepted. I sent A, B, and C along with the check.

A week later, I get the check BACK from Current Employer. They now want paperwork D,E, and F. I request this from the previous employer's plan... they send it. I just overnighted the check back to my current employer's plan.

My question: my understanding is that there is a 60-day time limit for these transactions. The check was dated 05/11/2006, which I think makes this day 44. If I can't convince my current employer to take the damn check, do I then owe the IRS 20% as withholding? Is this penalty the same regardless of the plan the money was in? Is there any way I can get around this? I really can't afford to pay 20% of my retirement savings in taxes right now (or ever) and am starting to wonder if my current employer could really screw me by not accepting the check a second time.
posted by selfnoise to Work & Money (6 answers total)
Call a financial institution of your choice and get them in on this. My understanding (IANACPA) is that you can roll that money into a qualifying IRA with no penalties. Someone like Fidelity or Vanguard, if you don't have another preferred source, can probably help you get this done. Call and ask, that much can't hurt, or cost you anything.
posted by Lyn Never at 6:46 PM on June 26, 2006

IANAFA (finanicial advisor), but I do work with 401(k) plans some. What you're describing is an INdirect rollover. If the check isn't made payable to you, you're not taking constructive receipt of the money, which is what would cause it to be a taxable event. You shouldn't have to worry too much about this paperwork snag.

That is my semi-informed understanding of how the process SHOULD work. Any tax advisors in the house are welcome to point out the flaws in my story here.
posted by Aznable at 6:49 PM on June 26, 2006

Okay, I'm going to start somewhere near the beginning.

Aznable has some of it there, but I figure we'll just try to give you the full treatment.

401(k) DIRECT Rollover - the funds go directly from one plan to another plan. Interestingly, this has nothing to do with how it's mailed. Aznable is again correct, if it's made payable to "New Plan For the Benefit of (FBO) [or "In Trust For"/"ITF"] selfnoise," then that's what you're doing.

401(k) INDIRECT Rollover - If you've done this, it will be a little obvious because 20% of it will have been withheld. THIS is where the 60 days come into play. Basically you have 60 days to dick around with the money in your name, but after that, you have to get it back into the right type of IRA/401(k)/403(b) plan in order to avoid penalties.

Direct rollovers can take a dog's age. If the check is dated 5/11/2006, even if the 60 days applied you have until July 11, 2006. If you just overnighted it, you will be fine. If something happens to the check, you need to get it stopped and a new one issued, and any clock that might even possibly be involved would be restarted --- but based on my recollection of how these things work, I don't think you are necessarily subject to that clock since you don't have constructive possession (ie, you couldn't cash the check - it's payable to New 401(k) and Yourself). This is a decent resource.

Good luck -- this can be a really, really annoying process depending upon the company involved. They take their damn time doing EVERYTHING. I once had a guy's rollover from 401(k) to his new IRA take -- no lie-- at least six months. Just don't be afraid to ask a lot of questions and try to get someone to explain to you the regulations that are effecting you and the process. Retirement is really complex, and you should be talking to retirement professionals who deal with this stuff every day at either the new or the old plan. They're used to a lot of questions -- even ones that you think are "stupid," -- and there is, in the opinion of one who used to answer these questions, nothing wrong with saying, "Tell me about X," and then let the guy on the other end talk until he's done, and then ask another question if you need to. They're paid to help you -- so get them on the phone and take advantage of it.
posted by Medieval Maven at 7:10 PM on June 26, 2006 [1 favorite]

Maven is correct. In your case you are doing a direct transfer from one trustee to another trustee and the 60-day rule does not apply since you never have possession of the money.

So given that things seem to be balled up and you may have to start over, you might consider one more possibility. Leaving an employer is a golden opportunity to get out of 401(k) hell. Instead of transferring the money into your new employers plan, you can transfer it directly into your own self-directed traditional IRA, tax-free. This has the advantage that you are no longer limited to the often lousy investment choices of your new employer. You also eliminate any hidden management fees of the new plan. In a self-directed IRA you can choose from thousands of mutual funds, stocks, CDs, bonds, etc. You can also later convert your new traditional IRA to a Roth IRA, if desired. You can still participate in your new employer's 401(k) plan with new contributions, but you now have a separate pile of IRA money that you can handle as you please. You don't have to make investment decisions right away. You could just have it transferred to an IRA trustee and have them place it in a money market fund until you figure out what you want to do with it. Vanguard or Fidelity could handle this for you.
posted by JackFlash at 11:23 PM on June 26, 2006

Thanks for all the advice, everyone! This helped immensely.
posted by selfnoise at 6:09 AM on June 27, 2006

Simple answer:

Take the check and open a 'rollover ira'. This will retain the capability to roll the money into an employer sponsored plan (most commonly a 401(k) but also a 403(b)) if you wanted to sometime in the future.

However, I agree with the above that there are many more choices avaialble by keeping it on your own IRA. The risk here is that the money if it is a small amount has a tendancey to get 'orphaned' and not watched closely and not managed well.

If this was a 'Direct Rollover' and the check was made out and sent to you the 20% would have already been withheld...FYI
posted by twiga at 6:33 PM on June 27, 2006

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