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Wednesday, January 6, 2010

Watch Out For The 401k 60 Day Rule

By Roger Harrison

It is often difficult what option you should use to get your funds out of your existing 401k account. One of the major stresses of this process is the uncertainty of what exactly you should be doing. Add this stress to already existing stress of managing your retirement account and the whole process can be rather overwhelming.

Because of the importance of this decision, it is critical that you take the necessary time to research and explore the different options you have to make this 401k transfer. Consulting your financial consultant or tax advisor is always a good idea.

Not only can a good financial planner steer you in the direction of which type of retirement account to transfer into (401k, Traditional IRA, Roth IRA, etc...), but they are also updated on the current tax laws regarding transfers.

As with many other tax issues, the IRS has complicated the process enough that a tax professional is required to sort through the rules. One of the rules that often traps investors is the 60 day transfer rule.

The 60 day rule simply refers to the amount of time that you are allotted to reallocate your funds from your retirement account. Once you make the decision to move your funds, the IRS doesn't want you to dawdle. They intend for you to be decisive in your decision and not drag out your choice.

Despite the simplicity of this rule, the tax implications of it are very present. The best way to avoid this penalty is to determine where the funds are going well before ever transferring them in the first place. A good advisor will help you get your ducks in a row before making the transfer. This allows you sufficient time to fill out everything that is required to move the funds.

The IRS has been notoriously strict on this 60 day rule. There are cases in which transfers on the 61st day have been rejected by the IRS. There are very few circumstances in which the IRS is lenient on this stipulation.

The only scenario in which the IRS may be somewhat lax on this rule is in the case of extreme circumstances or hardships. These circumstances are limited to cases such as death, incarceration, hospitalization, or disability. Though it is considered a compassion ruling to bypass the 60 day rule, the IRS does not provide a free pass to the taxpayer. Cases in which the compassion rule is applied will often see a fee for the waiver, dependent upon the size of the account transfer. - 23212

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