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Mikhil Bhat

<<I just spoke to my previous employer's Accounting head (it is a small corporation of 100 employees so they allow to deal directly with Accouting Heads ;-)) and this is what he told me to do for the rollover of the 401(K) funds to a Self Directed IRA. I just want to confirm this with you fools and TMF Pixy in particula. Here goes:

* My previous employer will send me a distribution form which I've to fill up and both me and my wife have to sign it in front of him or get it notarised.
* My previous employer will send this signed distribution form to the 3rd party plan administrator who will then forward the CHEQUE to my previous employer.
* Then my previous employer will send me the CHEQUE.
* Then I've to deposit that cheque in the IRA account (which I would've opened before this point) in 60 days time.
* After that I can transfer this monie from that IRA account to a ROTH IRA account and declare taxes spread over 4 years on the gains.

Is this information correct?>>

Only partially correct. The way you describe this transaction, a direct transfer of the money will NOT occur. Instead, you will be issued a check that is payable to YOU instead of your IRA account. If YOU can cash the check, the 401k administrator MUST withhold 20% of the proceeds against possible taxation. You then get the check for 80% of what was in the 401k and have 60 days to roll that money to your IRA. To achieve a 100% rollover, you must add the missing 20% from other assets. If you fail to do that, at the end of the year the IRS will call that 20% withholding a distribution. You will be taxed on that amount and penalized an additional 10% if you are younger than age 59 1/2. The only way to avoid that is to come up with the missing 20% during your rollover and then get the withholding back when you finally file your income tax return for the year.

The way to avoid this is to ensure the check proceeds are not made payable to you but to your IRA account. Your broker can tell you the exact wording that must be on the check's payee line. Then you must instruct the 401k administrator to make the check payable that way and not to you by name. I would be most surprised if your distribution form didn't ask for that data somehow in one of it's block's that need completion.

Beyond that one concern, the information you otherwise received is correct.


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