Q&A: Does IRA rollover rule apply to 401(k)s too?

Q: I have a question on the 60-day rollover rule for IRAs. Does this apply to a 401(k) also? I retired in 2014 and was told that I can leave my money in the current plan and it has been doing very well. I was told by the plan that I could not make draws on it and would have to take a full distribution if I wanted any funds. If the 401(k) is covered by the 60-day rule when would it start? – Jackie Cox, California​

A: The rules for 60-day rollovers from an IRA also apply to a 401(k), says Marcy Kelly, a certified financial planner with Kelly Financial Services.

“However, there is a difference in that any rollover from a 401(k) requires 20% to be withheld for federal income Tax, which a rollover from an IRA does not,” she says.  “This means that, if you had a $100,000 401(k) account and requested a 60-day rollover, your check would be for $80,000.”

You would then have to come up with the $20,000 that was withheld for taxes from other after-tax funds or you would owe tax on the $20,000 plus a 10% penalty if you are under age 59½, says Kelly.  “This is one reason it is better to do this as a trustee-to-trustee transfer rather than a 60-day rollover.”

Also of note, Kelly says there is no requirement for a 401(k) to continue to service accounts once an employee retires.  “This appears to be the case with your former employer,” she says.  “They are basically telling you, if you want to take any draws, the funds need to be transferred to avoid tax on the entire amount.  Unless you want to pay taxes, you have no option but to transfer it to an IRA.”

And, for the record, the 60-day rollover period starts when you receive the check if it is mailed to you, says Kelly.  “If the funds go to your bank account, it begins the date the funds go into the bank,” she says.

Kelly’s bottom line: Do a trustee-to-trustee transfer.

Robert Powell is editor of Retirement Weekly, contributes regularly to Paste BN, The Wall Street Journal and MarketWatch. Got questions about money? Email rpowell@allthingsretirement.com .