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After employment is terminated, an employee must decide what to do with his or her 401(k). Options include leaving the investment in the old company's 401(k) if allowed, combining it with the next company's 401(k), or rolling it over into an Individual Retirement Account (IRA). When compared to an IRA, a 401(k) usually does not give an employee as much control or as many investment options, so rolling it over into an IRA can be advantageous.

A 401(k) rollover can easily be transferred from brokerage to brokerage. If the employee is issued a check, up to 60 days is allowed to open or transfer to an IRA. If a check is issued to the employee, 20% is automatically withheld for tax purposes. If the employee is not able to cover the 20% withheld and add it to the IRA at the time of the rollover, the Internal Revenue Service (IRS) will consider the 20% withheld as income and the employee will be taxed on the 20%. In addition, the IRS will impose the early withdrawal penalty of 10%.

A direct rollover or “trustee to trustee” rollover between brokerages can be exercised electronically or in the form of a check. Taxes will not be withheld in a “trustee to trustee” rollover. The employee needs to notify the 401(k) manager that a direct rollover is planned. If a check is issued, the 401(k) manager makes out the check to the new IRA brokerage and the check must be deposited within 60 days to be exempt from taxation and early withdrawal fees.

Additional information on 401(k) rollovers can be found on the IRS Website at http://www.irs.gov/taxtopics/tc413.html.