401k Rollover To Ira - How to avoid the 10% penalty?

To avoid the 10% penalty for early withdrawal you can opt for a simple solution: 401k rollover to IRA. This is not the only reason why you should rollover your 401k funds into an IRA, but sometimes it may be the best solution you have for not being subject to the 19% penalty for early withdrawal. Moreover the 401k rollover to IRA let you avoid taxes being withheld from your fund, but there is a catch: you have to be aware of the deadlines for requesting this procedure as well as following correctly the procedure.

Before you choose this procedure of withdrawing your funds from your 401k plan, you have to know what an IRA is, how it works and learn the procedures for rollovers. An IRA is an Individual Retirement Plan. There are different IRA types and one can hold more than one IRA account. A rollover IRA for example is a perfect plan for one to withdraw fund from a 401k plan. Rollover IRA gives you the same tax advantages as the 401k plan, but gives you more investment options along with more flexibility. The good thing about not having to pay penalties and taxes when you decide to make a 401k rollover to IRA is that you can use the money that should have been withheld for taxes and penalties to have a bigger capital to invest.

You should however decide where you want to open your IRA account if you don’t have one already. The best option for you might be to open a Rollover IRA account to be able to rollover money from your 401k fund. A rollover can be paid directly to you or it can be implemented as a direct rollover. A direct rollover means that the money from your 401k funds is paid directly to your IRA account. The 401k funds can be sent directly in the IRA account or can be sent to you as a check payable to the IRA account.

If the rollover is paid directly to you there are two important things you have to do to avoid taxes and tax fine. First of all you need to know that you have 60 days to complete the deposit into the IRA account and you have to deposit 100% of your funds. This means that you have to cover the 20% withheld by the 401k administrator. This 20% withholding is a must. It does not mean you will owe the tax, but if you do deposit the 20% withheld from your funds, you can include the 20% withheld as income tax paid. The best thing to do if you want your 401k rollover to IRA to be less complicated for you is to ask for a direct rollover.

If the rollover is done through a check and your check is not payable to your IRA account then you have to specify on the Rollover applications that the money is coming from a check that needs to be processed as an indirect rollover. In order to avoid taxes and tax fine for your 401k rollover to IRA and no matter what type of check you receive you have to come up with the 20% withheld by your 401k administrator. And more importantly before starting the whole procedure make certain you talk to both your 401k administrator as well as with the IRA experts to ensure the safety of the whole procedure.