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Before we start discussing the 401k rollover time limitation, let us first take a look at what is 401k. This is retirement saving plan where you contribute through your salary before tax deduction. The money from this account is then invested in different areas like stocks, bonds, mutual funds or any other asset that your 401k plan offers. You are not taxed on any capital gains, dividends or interests until you decide to withdraw the money from the 401k plan.
When you separate from your employer, he should provide you information as to what options you have pertaining to your 401k account. One of those options is a direct rollover. Here the funds from your retirement account goes directly to a plan and no tax is withheld during this process. The other option to receive a check in your name and this is called indirect rollover. When you go for this option, your old employer will withhold 20 percent of the taxable amount and send it to the IRS. You will receive 80 percent and you have 60 days rollover time limit to invest the amount in another retirement savings plan. If you do not abide by the time limit you will be levied a penalty for early withdrawal and income tax as per federal and state laws.
In the indirect rollover there is a catch. You have to invest the entire 100 percent in a retirement plan. This includes the 20 percent sent to the IRS. If you do not do it within the time limit, the 20 percent will be considered as early withdrawal and you will have to pay early withdrawal penalty. The good thing is that you can get the 20 percent back from the IRS by filling out a special form when you file your tax returns. However, if you forget to fill out the form, you will lose the money entirely.
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