Why Can’t I Roll Over My 401k Without paying 20% Taxes? Actually You Can

Wondering, Why Can’t I Roll Over My 401k Without paying 20% Taxes? You may have heard that whenever you rollover your 401k into an IRA 20% of the money in your account is withheld in order to pay for taxes and penalties.

You only get 80% of your money. But that does not mean that you have to pay that 20% in taxes on your money and you will never see it. You can also get your money back, if you follow the rules correctly. Let me explain to you how it works.

Say you have $100,000 in your 401k and you want to roll the entire $100,000 over to a IRA. Instead of getting the $100,000 to deposit into your new account you receive $80,000 to deposit into your IRA. The other $20,000 is withheld for tax purposes. Ok you are probably wondering, where did my money go and what If I don’t want to pay any taxes on the money yet. That makes sense, after all the whole reason for getting an IRA or 401k is so that you can invest for the future while not having to pay taxes today.

However if you deposit the full $100,000 into your IRA then you will be able to write off that $20,00o that was withheld in taxes. So you only need to come up with that extra $20,000 to not have to pay taxes on it.

If you can manage to do that then you should come out even. However if you do not have that extra 20% lying around and cannot come up with the money then you are going to have to pay the taxes on your money anyways.

There is good news though if you are not able to money and you do not want to pay taxes on your retirement money. There is another option were you can bypass this whole ordeal and not have to worry about it at all.

How Can I Avoid This Headache?

The second option is to do a Trustee to Trustee Transfer. This is where your employer would simply transfer the full amount in your account to another account. If you do this you do not have to come up with the additional money in order to get your money back from taxes. That is always a good thing. It also makes it less of a headache for you.

In short doing a trustee to trustee transfer is a much easier and less complex situation that is worth taking a look at.