401(k) Rollover Mistake

A 401(k) rollover mistake can cost thousands in taxes if not handled correctly.

“You have to do it that way or you’re going to get messed up. Because if they send you the check, they are required by the federal government to withhold 20%.”

20% Tax Withholding Rule

The IRS requires 20% tax withholding on 401(k) rollovers when checks are sent to you.

“They have to withhold 20%, but you have to put a hundred percent into an account within 60 days to avoid taxation.”

60-Day Deadline

You have 60 days to deposit the full amount after receiving a check to avoid taxes.

“They have to withhold 20% and you don’t have 100% to do the rollover and you’re going to end up paying taxes on that other 20.”

Trustee-to-Trustee Transfer

Ask for a direct transfer to avoid 20% withholding and keep the full amount.

“You have to do it that way or you’re going to get messed up. Because if they send you the check, they are required by the federal government to withhold 20%.”

Tax Consequences

Unreplaced withheld amounts become taxable income with a 10% early penalty if under 59 1/2.

“They have to withhold 20%, but you have to put a hundred percent into an account within 60 days to avoid taxation.”

Ramsey's Advice

Ramsey recommends rolling over 401(k) balances into IRAs for more control.

“If they send you a check, they have to withhold 20% and you don’t have 100% to do the rollover and you’re going to end up paying taxes on that other 20.”

What Happens Next

Contact the IRS or financial advisor to fix a 401(k) rollover mistake before the 60-day deadline.