401k experts - someone please explain "indirect rollovers" to me
 

At first glance this sounds like a good option for me - I have a bunch of money (well, not as much as I did a few months ago :grr: ) in a former employer's 401k. Up to now I've just left it alone rather than going through the hassle of rolling it over. I'm thinking that doing an "indirect rollover" might be useful right now - it would give me some emergency liquidity if I need it within the coming 60 days and if not, I can simply put it into a fund of my choice after that time.

What do you guys think? What are the restrictions? Tax implications? If I use, say $1,000 to pay off bills and put the rest into another investment later, do I just pay the tax penalty on the $1,000? What investment vehicles are available for use to reinvest? Money markets? Currency trading? Foreign stocks & options? Or does it have to be a "conventional" 401k or Roth IRA (with their fees)?

Do you have 20% of the value of your current 401K in liquid cash right now? Do you have firm plans to have a new 401K in place an active within 60 days?

If no to either, then don't get an indirect. In fact, don't get one at all, I see zero reason for getting one except for certain extreme cases. It's a quick way to take money out of your bank (LOTS of money!) and give the feds a large interest free loan.

I am not any 401k expert -- not in the financial industry at all -- but here is a pretty good synopsis of your options I pulled up with a quick Google search. It sounds accurate (consistent with my current knowledge on the subject of rollovers):

http://www.themoneyalert.com/Sitstayrollover.html

Oh, and so you understand it better:
You have $100K in a 401k. you do an indirect rollover. They cut you an $80K check, and send $20K to the feds. You need to then supply the new 401K with $100K somehow within 60 days. They don't care how, just that you put $100K in their account.

So, can you take that $80K, and do whatever with it for 60 days? Yes. But you MUST have $100K back in the new account after that time.

If you have the $20K liquid to add in yourself to make up the difference, then you won't be needing that $80K infusion, so it makes no sense. If you DON'T have that $20K liquid yourself, then you're going to not make the mark, and you just lost $20K, gone, poof.

Here is what you need:

Rollover calculator:

http://planning.tdameritrade.com/srl/tda/calculators.jsp?client=tda&catid=000646

I'd roll over the entire amount from your old 401K into a self-directed IRA. You just call any of the brokers or mutual funds (Vanguard has the lowest fees), and they will send you the paperwork. You return it, and they do all of the rest. You will never see the money and will owe no tax.

As mentioned above, if you withdraw (that's really what you are doing) any money from a 401K or IRA, you will pay income taxes on it (whatever your Fed and state tax bracket is). You will also pay a 10% penalty (unless you are 59 1/2 years old or older). You'll regret doing this at your retirement.