401k Rollover and tax liability?

 

A 401k rollover allows an employee who has been employed at different organizations throughout his career to consolidate his 401k plans from different employers into a single 401k (if allowed by the current employer) or a similar retirement account such as an IRA. It is difficult to undertake a 401k rollover in comparison to an IRA rollover. Since a 401k-rollover process is quite intricate in nature, an employee must be fully aware of the potential benefits as well as the tax liability borne out of undertaking a 401k rollover. After deciding to go for a 401k rollover, an account owner can exercise either of the two options that have different tax liability for the account owner:

1.      Undertake a seamless 401k rollover to the new organization 401k plan – A rollover to the new organization’s 401k account keeps the tax benefits enjoyed by the account owner intact. There is no change in the tax liability of the account owner. Choosing this option also tends to simplify things for an employee. An employee can refrain from having to look after multiple 401k accounts by choosing to rollover to the new employer’s 401k plan. This becomes possible if the employee gets a new job offer before leaving his current employer. However, before going for a rollover, the account owner must check the investment options of the new 401k-plan into which he is rolling over his previous account.

2.      Undertake a 401k rollover into an Individual Retirement Account (IRA) – From the taxation point of view, a 401k rollover into a self directed IRA is a bit more complicated due to the differences in the nature of both these accounts. This is how it is undertaken: The account owner orders a spread of his current 401k plan assets (this is reported in the IRS Form 1099-R.) After receiving his assets, the account owner must put them into a new retirement plan within a span of sixty days; such a deposit must be reported in the IRS Form 5498. An account owner cannot undertake more than one 401k rollover within a span of twelve months. Choosing to rollover a 401k account is considered the best alternative for those employees who are interested in building up a comfortable retirement fund as it allows an employee’s savings to continue amalgamating tax-deferred while providing total control at the same time over allocation of assets.

Thus it becomes quite clear that if an employee contributes to several 401k plans during his working life, he may consider doing a rollover more than once. This consolidation, besides saving on record keeping and other such fee for each separate 401k plan leading to considerable operating costs, also makes managing the retirement accounts a lot easier since the employee need not keep track of several different 401k accounts. After a rollover, the employee’s retirement funds are not scattered into a number of different 401k plans that he had with each of his former employees. Instead, he can concentrate his attention on the consolidated retirement account owned by him after the consolidation process.