How can the early withdrawal penalty relating to 401(k) plan withdrawals be avoided?
First a direct trustee-to-trustee transfer may be made. This is where the trustee of the 401(k) plan sends the money directly to the trustee of the same recipients IRA account. The other method is where some taxpayers get in trouble if not all of the rules are followed. A taxpayer has 60 days, after the date of a distribution from a retirement plan, to roll 100% of the withdrawal into an IRA account. This includes any amounts that were withheld for taxes. Note that employers are required to withhold tax on retirement plan distributions paid directly to the account holder. In other words, to avoid a penalty you will need to deposit not only the amount of the check that was received, but also the amount of taxes that were withheld.
