No. The rollover isn’t complete. It’s a rollover mistake that happens too often.
They may have been given a ‘heads up’ that their employer would be withholding 20% for the amount of the check; but they didn’t know they’d have to make it up themselves!
True. Imagine. You have $300,000 in your 401(k) and you receive a check from your employer for $240,000 after withholding $60,000 for the I.R.S. You deposit the check and, within 60 days, you write a check for $240,000 for deposit into your IRA. But, the rollover still isn’t complete and the 60-day clock is still ticking!
Why? Believe it or not you have to make up that $60,000 from your own funds and deposit that money into your IRA before the 60-day clock runs out – hopefully you didn’t wait until 59 days had run out before you acted. It’s only after that final deposit brings the balance to the original amount, $300,000, that the rollover is complete.
How do you avoid this dilemma? You make sure your rollover is DIRECT. Make sure the money goes directly from your 401(k) custodian to the IRA custodian without you ever taking possession of the funds. Now, some employers will insist the check be sent to you. Okay. Have the check made out to the custodian for your benefit. Pay to (example) XYZ Company FBO Jim Lorenzen IRA. Your employer can give you the physical check but you’re not taking possession of the funds. In the memo space on the check you write your account number and provide it to your IRA custodian. The funds go directly into your IRA.
Oh, and guess what? On a direct rollover there’s NO 60-day clock and there’s NO withholding. And, using our example, you just saved $60,000 of other funds. Not bad.
If you’re making a rollover decision you may find this checklist helpful.