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ASK KIM
The Best Way to Roll Over a 401(k)
by Kimberly Lankford

I recently left a company where I had a 401(k). I want to roll over the amount I have ($25,000) into an IRA. Must I pay 20% in federal tax? And will I need to wait until I file 2003 taxes to get that 20% back?

Actually, the company won’t withhold anything in taxes if you transfer the 401(k) money directly to an IRA -- as long as you don’t touch it in between. Contact the administrator of your new IRA, which will help you open the new account and move the money.

The key is to have the check made out to the IRA administrator. If it’s made out to you, then the 401(k) company would have to withhold 20%. In that case, you could only avoid the early-withdrawal penalty if you deposited the full amount into the IRA within 60 days -- that includes the check you received plus the 20% that was withheld. Even though you'd get back that extra 20% when filing your taxes, you'd have to come up with the difference on your own within those 60 days. It's a lot easier to have the money transferred directly to the IRA instead, so nothing will be withheld.

If you leave your job after age 55, you can withdraw or transfer 401(k) money without penalty.

For more information about the rollover process, see "Take Your 401(k) With You."