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What is a Direct IRA Rollover?


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If you take the cash from your old employer administered 401k plan instead of rolling it over to a Rollover IRA, you will have to pay early withdrawal penalties (10%) and a 20% tax withholding fee. This applies only to qualified retirement plans and includes 401k plans, 403b plans and other profit sharing plans. What is a Direct IRA Rollover? * The above example assumes the 401k retiree is less than 59 and 1/2 years old and has to pay the 10% Early-Withdrawal Penalty fee. This 20% IRA Withholding law can be overridden by doing a 100% Direct IRA Rollover to your own Individual Retirement Account (IRA). This is because companies by law are required to withhold 20% of your entire 401k savings account for tax purposes. This law is implemented to discourage retirees from withdrawing money from their plans early on and let it earn the power of compounding interest. This means the money never actually reaches your hands, it is wired from your old 401k administrator to your new one. However, if you are older than 59 and 1/2, this 10% early-withdrawal penalty fee does NOT apply to you.
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