• Handle your 401k properly to avoid tax penaltiesTAX TIME image by brelsbil from Fotolia.com
  
  When you change jobs, you have a number of options when it comes to your 401k plan. If the current custodian allows it, you can leave your money where it is. You can take the cash, but that could trigger some big tax bills if you have not yet reached retirement age. But many times the best strategy is to roll the money in your 401k plan over to a self-directed IRA. When doing so, however, it is important to be aware of the IRS regulations governing such transfers.
  
  

Custodian to Custodian

• One of the most important things to keep in mind when rolling over a 401k plan to an IRA is that the transfer must be made from the current custodian directly to the new custodian. The money must never actually enter our possession--if it does it could be subject to a tax penalty of 20 percent, as well as ordinary income taxes on the money that is withdrawn.
  
  The easiest way to comply with this IRS regulation is to complete an account transfer form for the custodian you want to transfer your 401k money to. Write the name of the current custodian and the account number on the form and send it to the IRA custodian. The IRA custodian will take care of the transfer, ensuring that the money is not subject to taxation.
  
  

60 Day Rule

• In order to qualify for tax free treatment, the money in the 401k must be rolled over to an IRA plan within 60 days. This 60-day period begins on the date you separate from your employer, either as a result of your retirement or voluntary resignation or as a result of a layoff or involuntary termination. That is why it is important to for employees to start the transfer process as soon as they know their employment is ending.
  
  

Age Requirements

• If you are at least 59.5 years of age, you are eligible to receive distributions from your current 401k program without tax penalties, although you will still be responsible for ordinary income taxes on the amount you choose to withdraw. If you do decide to withdraw money from your 401k you will need to set aside enough money to pay the taxes. For instance, if your tax rate is 25 percent and you withdraw $40,000 from a 401k, you could owe as much as $10,000 to the IRS. You can choose to roll over part of the 401k and withdraw the rest.