401(k) Direct Rollover Process Explained

Written by Dean Moro BComm, CIM®, CRPC™, Associate Portfolio Manager & Carson Hamill CIM®, CRPC™, FCSI®, Associate Portfolio Manager & Assistant Branch Manager

A 401(k) direct rollover is a method for moving your retirement savings from one qualified retirement account (such as an old employer’s 401(k)) directly into another qualified plan (like a new employer’s 401(k) or an IRA) without triggering taxes or penalties.

• Key Steps in a Direct Rollover
• Why Choose a Direct Rollover?
• What Happens If You Don’t Use a Direct Rollover

Key Steps in a Direct Rollover

• Initiate the Rollover: Contact your old 401(k) plan administrator and request a direct rollover. You’ll need to provide details about your new retirement account, such as the account number, the name and address of the new plan or IRA custodian, and any required paperwork56.
• Funds Transfer: The funds are sent directly from your old plan to your new plan or IRA. This can be done via wire transfer or by mailing a check. Importantly, the check should be made payable to the new plan or IRA custodian-not to you personally578.
• No Tax Withholding: Because the money never passes through your hands, there is no mandatory 20% federal tax withholding, and you avoid early withdrawal penalties578.
• Timeline: The process can take several days to a few weeks, depending on the providers involved. If a check is mailed, allow extra time for delivery5.

Why Choose a Direct Rollover?

• Maintains the tax-deferred status of your retirement savings.
• Avoids mandatory tax withholding and potential early withdrawal penalties.
• Simplifies account management by consolidating retirement assets.

What Happens If You Don’t Use a Direct Rollover?

If you choose an indirect rollover (where the distribution is paid to you), your plan administrator must withhold 20% for federal taxes. You then have 60 days to deposit the full amount (including the withheld portion, using other funds) into a new retirement account. Failing to do so makes the distribution taxable and, if you are under age 59½, subject to a 10% early withdrawal penalty.

In a direct rollover, the funds are sent straight from your 401(k) into your new account without you touching the funds. It’s important that you specify a direct rollover so that you don’t have the check made payable to you. You could trigger a mandatory 20 percent withholding for taxes, and the IRS charges a 10 percent bonus penalty on withdrawals made before age 59 1/2.

Bottom Line

A 401(k) direct rollover is the safest and most efficient way to move retirement assets between qualified accounts while preserving tax benefits and avoiding unnecessary penalties or tax withholding. Always ensure the transfer is made directly between custodians and act promptly to avoid complications.

Next Steps

If you are planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email our team at Snowbirds Wealth Management, as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have an integrated team in your corner.

About Snowbirds Wealth Management

Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate financial advisors with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.

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