401(k) and Other Qualified Employer Sponsored Retirement Plan Distribution Option FAQs and Answers

A direct rollover occurs when your qualified employer sponsored retirement plan (QRP), such as 401(k), 403(b), or governmental 457(b) distribution is sent directly to your IRA provider or another QRP. There are no taxes or IRS withholdings, which helps preserve your retirement savings and your assets retain their tax-advantaged growth potential.

An indirect rollover is one where you receive a check made payable in your name from either a former employer’s QRP or a current employer’s QRP and you have 60 days to roll over those assets by having them deposited into an IRA or a QRP, if the plan allows. The distribution must be eligible to be rolled over. Failure to complete a rollover during that 60-day time frame will trigger taxes, and depending on your age, an IRS 10% additional tax for early or pre-59-1/2 distributions. Note: Governmental 457(b) plans are not subject to the 10% additional tax. This will also end any tax-advantaged compounding on those funds. 

A direct transfer occurs when your IRA provider sends your IRA assets to another IRA held with that provider or to another IRA custodian. There are no taxes or IRS reporting for this method. This generally involves completing a transfer form at the receiving institution. You can complete an unlimited number of direct trustee-to-trustee transfers per year.

When you take a distribution from your IRA you have 60 calendar days to roll it back into that IRA or an IRA at another institution. However, there are additional rules to be aware of so you do not create a potential taxable event.

• First, you are limited to one 60-day IRA-to-IRA rollover every 365 days. This limitation applies to you, the IRA owner, on an aggregate basis for all IRAs of any type that you own. The 365-day time limit begins when the IRA distribution is received, not when it is deposited as a rollover contribution.
• Second, the assets rolled back into the IRA must be the same assets distributed from the original IRA. So, if cash is distributed, cash must be rolled over; if securities are distributed, the same securities must be returned.
• Last, you do not need to elect tax withholding from your IRA distribution if you intend to roll over the distribution.

Please keep in mind that rolling over your QRP to an IRA is just one option. Each of the following options are different and may have distinct advantages and disadvantages. 

1. Roll/transfer assets to an IRA
2. Leave assets in your former employer’s QRP, if QRP allows
3. Move assets to your new/existing employer’s QRP, if QRP allows
4. Cash out or take a lump sum distribution

The option that is best depends on your individual circumstances. You should consider features such as fees and expenses, services offered, investment choices, when distributions are no longer subject to the 10% additional tax, treatment of employer stock, when required minimum distributions begin and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with QRPs. You should consult with the QRP administrator and a professional tax advisor before making any decisions regarding your retirement assets.

Rolling over your QRP to an IRA takes just three steps. Learn how to roll over.

Very likely. Wells Fargo offers a wide range of investment options that mirror those available in most QRPs, including mutual funds, stocks, and bonds. See your rollover options.

Yes, you can combine assets and cash rolled over from QRPs with your IRA contributions and earnings in the same account. However, Traditional IRA and QRP contribution and earnings must be kept in a separate account from Roth IRA and QRP designated Roth account contributions and earnings.

Spouse and non-spouse beneficiaries have several options when they inherit a QRP, including the following:

• Transfer to an Inherited Traditional IRA
• Transfer to an Inherited Roth IRA
• Convert to an Inherited Roth IRA

Additionally, only a spouse could:

• Rollover to their own IRA
• Convert to their own Roth IRA

There are typically four options available to you:

• Roll your money over to an IRA, where it can continue its tax-advantaged status and growth potential for retirement. In addition, an IRA often gives you access to more investment options than are typically available in a QRP.
• Leave your assets in your former employer's QRP, if the plan allows, where it can continue its tax-advantaged status and growth potential for retirement. You will continue to be subject to the QRP’s rules regarding investment choices, distribution options, and loan availability. If you choose to leave your savings with your former employer, remember to periodically review your investments and carefully track associated account documents and information.
• Move your money to your current/new employer's QRP, if the plan allows, where it can continue its tax-advantaged status and growth potential for retirement. This may be appropriate if you want to keep your retirement savings in one account, and if you’re satisfied with the investment choices offered by that QRP.
• Take a lump-sum or cash-out of your QRP; you will generally owe ordinary income taxes and possibly an IRS 10% additional tax. You should carefully consider all of the financial consequences before cashing out your QRP savings. The impact will vary depending on your age and tax situation. If you absolutely must access the money, you may want to consider withdrawing only what you will need until you can find other sources of cash.

Learn the potential consequences of taking a distribution before retirement from your QRP.

A QRP designated Roth account can roll to a Roth IRA.

One way to benefit from tax-advantaged growth potential and possible tax-free distributions is to convert your QRP eligible distribution to a Roth IRA. A conversion allows you to reposition your existing tax-deferred QRP assets to a potentially tax-free Roth IRA by paying federal and possibly state income tax (but without the 10% additional tax for early or pre-59 1/2 distributions) on the taxable portion of the conversion. Before you convert be sure you have met with your tax professional to review your specific situation, because once you convert, you can no longer recharacterize, or undo the conversion.  

It is important to remember that generally, you must have a triggering event, such as separation of service, to be eligible to make distributions from your QRP. Learn more about converting to a Roth IRA.

You may be able to access your QRP for hardships, loans or other provisions. Generally, you must have a triggering event, such as separation of service, or plan termination to be eligible to make distributions from your QRP. Contact your plan administrator for information specific to your QRP.

If you leave your employer with outstanding plan loan amounts, explore your options including the following:

• Repay the loan. The plan may give a short period of time (e.g., 30 or 60 days) to repay that outstanding balance. However, if not repaid, the outstanding loan balance is generally subject to income tax and possibly a 10% additional tax for early or pre-59 1/2 distributions for younger workers.
• Bank loan. Consider whether obtaining a loan from a bank to repay your plan loan would be a good financial strategy.
• Continue plan loan payments. Check with your plan administrator to see if this is an option. 
• Rollover cash to an IRA to repay some or all of a loan offset.   The loan offset amount will be taxed as ordinary income and may be subject to the 10% additional tax. However, you can avoid taxes by rolling over the loan offset amount to an IRA by your individual federal tax filing deadline, including extensions, for the year the offset occurred.
• Roll loan to new plan. If you are currently working for an employer that offers a QRP that provides for both rollovers and plan loans, investigate the possibility of rolling your loan into your new plan.

When you leave your employer you may be able to take a partial distribution from the QRP and leave the rest there, if the plan allows, or roll the balance to an IRA or another QRP.

It is important to know that you avoid the 10% additional tax for early or pre-59 1/2 distributions if you leave the company in the year you turn age 55 or older (age 50 or older for certain public safety employees and private sector firefighters).  Distributions from IRAs prior to age 59½ may be subject to a 10% additional tax, unless an exception applies.

If you have access to other money, you may want to avoid taking money out of your QRP. Even a small distribution can have a drastic effect on the growth of your retirement savings. See an example of the power of compounding interest over time on your existing balance.

You can, but it's a good idea to consider the impacts. A QRP distribution made payable to you will trigger taxes, and depending on your age, the 10% additional tax for early or pre-59 1/2 distributions unless you roll over those assets by having them deposited into an IRA or QRP within 60 days. While completing an indirect rollover seems fairly easy, there are several rules that can make it complicated.

• First, the QRP is required to withhold a mandatory 20% for federal taxes when you receive a check, made payable to you, from your QRP. Some states may require withholding of state taxes as well.
• Second, to avoid paying taxes and potential 10% additional tax for early or pre-59 1/2 distributions on the distributions, you will need to roll over the total amount (including withholding) distributed into an eligible retirement account within 60 days of your receipt. This is accomplished by personally depositing (out of pocket) the 20% tax withholding that was deducted from your distribution within the 60-day period.
• Last, you are not required to deposit the entire amount at one time. Instead, this rollover can be completed with multiple rollover deposits as long as the deposits are completed within the 60-day period.

Not on a direct rollover, which is when your employer sends your QRP distribution directly to your IRA provider or new QRP. There are no taxes or IRS withholdings, which helps preserve your retirement savings.

Yes. You will receive two tax forms — an IRS Form 1099R, reporting that you took a distribution from your former employer's QRP, and an IRS Form 5498, reporting that you made a rollover contribution to your IRA. Even if no portion of your rollover is taxable, you must report it on your tax return.

Call 1-877-4WF-IRAS (1-877-493-4727) to speak to a Retirement Specialist today.