Withdrawing from a 401(k)?

[ead79]

I have a whopping balance of $750 in a 401(k) from an old job. I just got a letter from them saying that I have to transfer the balance. However, they state that the amount is not large enough for me to roll over into an IRA (since it’s less than $1000). I don’t want to roll it over into my current company’s 401(k), but that’s a whole other story, LOL. What would the penalties be if I just withdrew the money? I think it mentioned a 10% penalty plus tax penalties. I want to be sure that the tax penalties aren’t huge. I’m nowhere near retirement age, so I wouldn’t be able to avoid the penalties.

 

[Bob Slydell]

It's a pretty large penalty, IIRC. Not only is there the early penalty for withdrawal, but you also have to pay income tax on all the money received, so come April 15th, there's extra taxes to pay. When you get done with all the taxes and penalties, you'd be lucky to have half of that money left.

I would either roll it into your current 401K, if possible or come up with the extra $250 to open the IRA account. You'll be better off in the long run.

 

[golfgal]

Isn't there some low limit as to which you can withdraw the money without the penalty, like a balance under $1000? Even if you do take it out don't they keep 20% for taxes and then you COULD be subjected to an additional tax when you file your income tax for not having enough taxes withheld during the year. In this case you would be taking about $150 in early withdrawal penalties but I can't imagine at tax time it would make a different in your withheld taxes.

 

[jen0610]

If I remember correctly from previous time, I lost just about HALF of it to taxes and penalties. Was young and dumb back then, would roll over to your current plan or like someone else stated, come up with the 250.00 to make the 1000.00 for an IRA.

 

[ducklite]

What might be better is to take the $750, and add $250 of your money to it to make the $1000 you need for an IRA. You'll be able to deduct the $250 "out of pocket" from your income as an IRA contribution, and not have to pay taxes and pentalities (which will probably amount to close to $300) on the 401K money.

I'm not an accountant, tax advisor, or lawyer.

Anne

 

[PoohPrincess76]

I had about the same amount in an old 401(k) in CA a few years ago. I think after taxes I still netted about $500, but, I was a single, low income mom, so, I had quite a few other tax breaks at the same time. I would consult an account to find out for sure with your situation.

 

[grimley1968]

I just have a question: why do you have to transfer the balance out of that account? I thought 401k's were supposed to belong to individuals to do what they please with them? My understanding was that you could keep it as long as you want and contribute to it out of your own pocket, or just let it sit there. Of course, your old company is under no obligation to continue to fund it at all. If that is the case, I'd keep it long enough to add enough to make it $1000, then roll it over into an IRA of your choice.

 

[Figment2]

Actually it isn't too small to roll into an IRA. Go to your local bank and they probably have a IRA savings account that you would qualify for.

I don't suggest taking it as a total distribution. It could be just enough to bump you into a higher tax bracket. Under 59-1/2 you declare the total amount as income then add the 10% penalty (although there are waivers to the penalty for death & disability).

Cyn

 

[ead79]

I didn't realize that I could front the $250 to meet the $1,000 minimum required to fund the IRA. That might be the best bet.

grimley1968, that was my question too. I had an even older 401(k) that I just kept for years until I had a new one to roll it over into. I wasn't under the impression that they could force you to take the money out, but the letter I received said otherwise.

 

[grimley1968]

Was the letter from your previous employer or the 401k provider? If it's from the previous employer, I'd resist the order. If it's from the 401k provider, there may be much more basis for them to make such a claim than the previous employer.

 

[mickeyboat]

There are new IRS regulations that allow former employers to force a pay-out of account balances less than $1000. It keeps former employers from having to pay fees to the 401(k) providers and accountants for former employees with very small balances. And forces employees to keep track of their balances which they may have left in more than one employer's account.

I believe you received a notice that says if you do not let them know where you want the money to go, you will receive a pay out in cash. So don't delay if you want to roll it over.

I think taxes would amount to a 20% withholding and 10% penalty for early withdrawal. You would have to claim the amount as income on your taxes.

Denae

 

[ead79]

Was the letter from your previous employer or the 401k provider? If it's from the previous employer, I'd resist the order. If it's from the 401k provider, there may be much more basis for them to make such a claim than the previous employer.

It was from the 401(k) provider, and was just like mickeyboat explained. Thanks everyone! I think I'm going to just go ahead and roll it over into my new employer's 401(k) program even though I don't know how long I'll be here.

 

[mickeyboat]

Where I used to work, we did three pay-outs this year. Our provider recommended we do it, gave us form letters to use, but we (as the employer) actually sent them out. It makes no difference who the letter comes from.

Denae

 

[Bob Slydell]

It was from the 401(k) provider, and was just like mickeyboat explained. Thanks everyone! I think I'm going to just go ahead and roll it over into my new employer's 401(k) program even though I don't know how long I'll be here.

Well, if you do happen to leave your current employer, you can always roll it over again. There's no limit as to how many times 401K money can be rolled over. It's a pain, true, but IMO, it's nice to have all your retirement investment in the same place.

 

[grimley1968]

There are new IRS regulations that allow former employers to force a pay-out of account balances less than $1000. It keeps former employers from having to pay fees to the 401(k) providers and accountants for former employees with very small balances. And forces employees to keep track of their balances which they may have left in more than one employer's account.

I believe you received a notice that says if you do not let them know where you want the money to go, you will receive a pay out in cash. So don't delay if you want to roll it over.

I think taxes would amount to a 20% withholding and 10% penalty for early withdrawal. You would have to claim the amount as income on your taxes.

Denae

WOW! Now that's what I call an answer! I guess that law makes sense. I hadn't heard of that, which of course led to my about that letter.

It looks to me like you're going to either lose some money because of the penalty and taxes, or by having to ante up a little more money to get the balance over $1000. I'd go with the latter myself, and then try to roll over into a good IRA, 529 or something.

 

[ducklite]

I had an even older 401(k) that I just kept for years until I had a new one to roll it over into. I wasn't under the impression that they could force you to take the money out, but the letter I received said otherwise.

I got a similar letter about eight years ago. My former employer was changing their 401K plan to a different investment service, and wanted to close it all out. The letter was weorded that I "had" to remove the funds--and it gave me less than a week to do so. (They claimed they couldn't get hold of me--right, I had the same address as I did when I worked there, and that all my statements came to. )

At any rate, I called the company, and when I pushed the issue, I found out that indeed I was under no obligation to make the change, it was for my former employers benefit for me to. I got around to it--about five years later.

Anne

 

[mickeyboat]

I got a similar letter about eight years ago. My former employer was changing their 401K plan to a different investment service, and wanted to close it all out. The letter was weorded that I "had" to remove the funds--and it gave me less than a week to do so. (They claimed they couldn't get hold of me--right, I had the same address as I did when I worked there, and that all my statements came to. )

At any rate, I called the company, and when I pushed the issue, I found out that indeed I was under no obligation to make the change, it was for my former employers benefit for me to. I got around to it--about five years later.

Anne

Anne, I think the regulations with regard to this issue are relatively recent. I believe the threshhold was just raised to $1,000, so it includes many more former employees than it used to. We used to send out letters just encouraging people to roll over their monies. This is the first year (I think it was the tail end of last year when I first heard about it) when we were able to force the distribution.

Denae

Edited to add a link: It doesn't actually spell out the regs, but it basically says an employer cannot distribute amounts over $1000 without your consent (thereby allowing them to distribute amounts less than $1000)

http://www.irs.gov/retirement/participant/article/0,,id=151787,00.html

 

[ducklite]

Anne, I think the regulations with regard to this issue are relatively recent. I believe the threshhold was just raised to $1,000, so it includes many more former employees than it used to. We used to send out letters just encouraging people to roll over their monies. This is the first year (I think it was the tail end of last year when I first heard about it) when we were able to force the distribution.

Denae

I read the other posts after I posted, so yes, this all makes sense. It was fun tormenting the previous employer though. (It was funded at probably close to $60K and fully vested at the time, which probably also changes "the rules" a bit...)

Anne

 

[Fire14]

What i did was took mine 401k money and rolled it over into at the bank.