If you don’t reinvest your 401(k) during those 60 days, you will face severe tax penalties for withdrawing the money before your retirement.
How A Direct Rollover Works
A direct rollover of your 401(k) means that you can transfer the money without paying any tax penalties. The funds move from their current account at your old company or bank to a new one directly. The banks exchange your funds without you having to be the middleman. Because you are never in possession of your 401(k) cash, it doesn’t get hit by taxes in the process.
Why Not To Do An Indirect Rollover
If you do an indirect rollover, the companyÂ holds 20% of your 401(k) funds for taxes and gives you the rest. You then have only 60 days to reinvest that money in a new 401(k) or IRA account. If you don’t reinvest it during those 60 days, you will face severe tax penalties for withdrawing the money before your retirement. In other words, you risk losing a big chunk of your retirement change.
Photo: Urban data