I recieved a check from my older employer with my 401k money I contributed.

[rbradburn27]

I received a check from my older employer with my Empower 401k contributions. It was under $1000 dollars. All it says on the letter is a tax form will be mailed to you by January 31st of next year and should be used in completing your tax return. The IRS already took money out of the check. On the statement, it says Internal Revenue Service Withholding is these the taxes taken out? I've never had this happen before. Can I cash the check or will I be penalized since I'm under 59 1/2? 

[VolvoGirl]

Yes it's your money.  You will get a 1099R form in January to enter into your tax return.  You will get credit for the withholding taken out.  Yes there is a 10% Early Withdrawal Penalty for under 59 1/2.  You might be able to roll it into an IRA account to avoid the tax and penalties.  You have 60 days to put it into an IRA.  And you need to add in the withholding from your own money so you deposit 100%.  

[rbradburn27]

@VolvoGirl the 10% is just on the amount of the check right? 

[dmertz]

If you are under age 59½, whatever portion of the entire gross amount distributed (the amount of the check PLUS the 20% mandatory taxes withheld) is not rolled over within 60 days of the distribution will be subject  the 10% early-distribution penalty.  The gross amount will also be subject to ordinary income taxes.  The rollover can be made to a traditional IRA to continue to defer income taxes and avoid the early-distribution penalty on the amount rolled over.  To roll over the enter gross amount you will need to substitute other funds for the portion withheld for taxes and you'll get any overpayment of taxes as a refund when you file your 2022 tax return.

Even though this was a mandatory distribution due to having an account balance under $5,000, your employer was required to have provided you with your rollover options prior to making the distribution.  Ignoring that information results in a distribution paid to you after the notification period has elapsed.

[Opus 17]

Briefly, this is a taxable distribution to you, the same as if you had requested a total withdrawal of your account. You had 60 days to rollover the money to another qualified employer account or to a private IRA. If you did not perform a rollover, then the entire distribution is taxable income to you plus a 10% penalty if you are under age 55. Any withholding that was taken at the time the check was mailed to you will be counted toward your tax payments, and will increase your refund or reduce the tax you owe.  You will receive a 1099R at the end of January and you must include this statement on your tax return to report the income and calculate the tax.

[Opus 17]

If it has been less than 60 days, you can open a private IRA and deposit the money to the IRA as a rollover.  Many banks and brokers have low-cost IRA options. Make sure you tell the IRA custodian that this check represents a rollover and not a contribution.  You can then allow the money to grow toward your retirement, and you may be eligible to make additional IRA contributions depending on your income and work situation.

You will still receive a 1099R from the 401(k) plan in January, but on your tax form you will indicate that you did a rollover with the money, and you will not pay tax or a penalty.