401K Early distribution

[giralinas]

Hello, what should I do if I received a check from a closed 401K from a former employee and I am less that 59 1/2? I worked with them only one month this year, I didn't like the job so I resigned. I totally forgot I had 401K with them. I received this check  recently for a few hundred dollars and they withhold about 10% of the total for tax purposes. I read that when this happens, I should deposit the full amount in another retirement account like an IRA plus the amount withhold for taxes, is that correct?  I tried to do it and the bank where i have my IRA told me I shouldn't do that... so I am confused. Can someone guide me? Thanks in advance.

[VolvoGirl]

Yes you can do that if you have time.   You have 60 days to roll it over to a IRA.   You can replace the withholding with your own money or the tax withheld will be a distribution and taxable.  And there is a 10% Early Withdrawal Penalty under 59 1/2.   There is a penalty exception if you were over 55 when you left the job.

401K  penalty exceptions

https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/exceptions-penalty-e...

You will get a 1099R in January to report it on your tax return.   If you roll it over to the IRA you should get all the withholding back on your tax return.   

[Opus 17 · Accepted solution]

You have 60 days to deposit the money into your IRA. Make sure you tell them it is a rollover and not a contribution. (This is critical.)

If the withdrawal was $500 and you got a check for $450, then either:

a. deposit $500 as a rollover, it doesn't matter where you get the extra money from.  It will count as a rollover.  The $50 withholding will come back to you in your tax refund.

b. if you deposit the net $450 as a rollover, then $50 will count as a taxable withdrawal, subject to income tax plus a 10% penalty.  The $50 withholding goes to your credit on your tax return along with other tax withholding and will come back as a refund if you have more withholding than you owe.

If you miss the 60 day window, the withdrawal will be fully taxable.  If the IRA codes it as a contribution instead of a rollover, the withdrawal will be taxable, but might be offset by the contribution.  But if you already maxed your contributions, then you will have an excess contribution and penalty situation.  So make sure it goes in as a rollover.  

I don't know why your bank discouraged you from doing a rollover, maybe they misunderstood what you wanted to do.  You could open another IRA at a different bank, if necessary. 

[giralinas]

Thank you! Very helpful!

[giralinas]

Thank you for your answer!