Rollover

How long does it take to rollover a 401(k) to an IRA?

How long does it take to rollover 401(k) to an IRA? Find out the rollover rules for moving funds from a 401(k) to IRA, including the time limits and costs involved.

3 min read

If you are changing jobs, one of the considerations you should make is what to do with your 401(k) plan. Do you cash it or roll it over to an individual retirement account (IRA)? While cashing it out is an option, you will get a lower payout after tax and penalty deductions. Your best bet is to move funds to an IRA.

A 401(k) rollover to an IRA takes 60 days to complete. Once you receive a 401(k) check with your balance, you have 60 days to deposit the funds in the IRA account. If you choose a direct custodian-to-custodian transfer, it can take up to two weeks for the 401(k) to IRA rollover to complete.

Generally, when choosing what to do with your 401(k) money, remember the IRS wants the retirement money to remain in a retirement account. If you cash it out or do an early withdrawal, the distribution will be subjected to ordinary income taxes and penalties. However, moving funds from a 401(k) to an IRA keeps the funds intact as long as you observe the 60-day deadline.

How Long Does a Direct 401(k) Rollover to IRA Take?

The quickest way to rollover your 401(k) money to an IRA is through a direct rollover. When doing a direct rollover, the 401(k) plan administrator will transfer your assets directly to your specific IRA, usually through an electronic transfer. A direct rollover can take 1 to 4 days, depending on the plan administrator.

Usually, there are no time limits for a direct rollover. Before requesting a direct rollover, you must open an IRA account where the funds will be transferred, and complete paperwork with your 401(k) plan administrator.  Also, check your 401(k) balance to know the amount you should expect to receive. Once you’ve provided your IRA plan details, the 401(k) plan administrator will initiate a wire transfer or write a check to the IRA. 

If you choose a direct rollover, you will get your 401(k) money without paying income taxes. This is because the funds do not go through your account, and hence, the funds are not considered a distribution for income tax purposes.

How Long Does an Indirect 401(k) Rollover Take?

401(k) plan administrators may force an indirect rollover if you have less than $1000 in your account. You may also choose an indirect rollover if you want to use the funds as short-term credit, and deposit the funds into the IRA account before the 60-day deadline expires. When you request the funds, the 401(k) plan administrator will liquidate any non-cash assets in your account, and send you a check.

The 60-day rule applies to indirect rollovers, and it requires you to deposit the funds into an IRA within 60 days of funds transfer from the 401(k) plan. Funds deposited within the 60 days do not attract income tax or early withdrawal penalty. However, if you miss the deadline, the IRS treats the money as an early withdrawal and subjects it to income taxes at your tax bracket rate and a 10% early withdrawal penalty.

For example, if the 401(k) plan administrator sent you a check for $40,000, you must deposit the funds within 60 days. Assuming that you deposit the funds on the 61st day since the date of receipt, you will be required to include the distribution in your annual taxable income for the year, and pay taxes on the distribution. IRS will also charge you a 10% penalty, equivalent to $4,000 if you are below age 59 ½.

Tax Withholding on Indirect 401(k) Rollover

When a 401(k) plan administrator writes you a check, the IRS requires them to withhold 20% of the funds as taxes. For example, if your funds total $40,000, the plan administrator will withhold $8,000, and write you a check for $32,000.

If you plan to deposit the funds into your IRA, you must make up the amount withheld, and deposit the entire amount within 60 days i.e. $40,000. After transferring the amount to IRA, the IRS will refund the 20% withheld amount when you file your annual returns. However, if you do not deposit the entire amount with 60 days, you will be required to pay income taxes, and an early withdrawal penalty if you are below 59 ½ years.

Why Roll Over Your 401(k) into an IRA?

Moving your funds from a 401(k) to an IRA offers various benefits that you are unlikely to find in a 401(k) plan. While 401(k) are limited to a few investment choices like stocks and bonds, IRAs have a wider pool of investments ranging from EFTs, REITs, Certificates of Deposits, stocks, and bonds. This can help you create a diversified portfolio and have multiple income streams.

Also, IRA tends to be less expensive than 401(k) plans. Due to the limited investment choices in 401(k), you will have to incur higher costs in administrative fees, fund expense ratios, and management fees, which can reduce your overall return. While IRAs are not free of fees, the higher number of investment choices means you can pick investments with the lowest fees and exercise more control over how you invest.