Types

• The IRS permits money from a 401k plan to be rolled into a number of other qualified retirement plans. Rollovers from a 401k plan to another 401k plan, 403b plan, SEP IRA or traditional IRA do not result in any tax liability because you are moving the money from one tax-deferred account to another. If you move the money from a 401k plan to a Roth IRA, you must include the amount of the rollover as part of your taxable income because you are moving the money from a tax-deferred account to an after-tax account. You cannot roll money from a 401k plan into a SIMPLE IRA or a Roth 401k or 403b plan.
  
  

Benefits

• People choose to roll over their 401k plan for a variety of reasons. When you leave your job, you may want to move the money to your new company's 401k, 403b or SEP IRA plan. You may also want to move the money into a traditional IRA to consolidate your retirement funds. If you think that you will be in a higher income tax bracket when you take withdrawals, or if you want to avoid required minimum distributions, you may want to roll the money into a Roth IRA because Roth IRA withdrawals are tax-free and the account is not subject to required minimum distributions.
  
  

Function

• To perform a rollover, you must request a distribution from your 401k plan. The money, after 20 percent withholding for income taxes and penalties you may owe if you fail to complete the rollover, will be paid to you and you must then redeposit the amount requested in another retirement account. For example, if you requested $25,000, you would only receive $20,000 because $5,000 would be withheld. However, you must still redeposit $25,000 to complete the rollover.
  
  

Time Frame

• You must redeposit the money from your 401k plan rollover into another qualified retirement plan within 60 days to avoid the money being considered distributed by the IRS. The amount requested, not the amount you receive, must be redeposited. Money not redeposited will be considered a 401k plan distribution, which must be reported on income taxes and, if you are under age 59 1/2, will be subject to a 10 percent early withdrawal penalty. In addition, you cannot perform a rollover from the account the receives the funds for at least 12 months after the money is deposited.
  
  

Considerations

• If you do not need to access the money during the time between receiving the funds and redepositing the money in your account, you should consider a transfer rather than a rollover. With a transfer, the money is moved directly from your 401k plan into the new plan without you having to deal with the withholding or redepositing the money. This way, you avoid any chance that you could make a mistake that could cost you thousands in taxes and penalties.