the penalty is 10%.
your best bet is to put the money in a self-directed Roth IRA account.
The early distribution penalty is 10% of the gross amount distributed.
The plan administrator is required to withhold 20% for federal income taxes on the distribution.
In January 2024 you will receive a Form 1099-R for the distribution. The form is entered on your federal tax return. Any federal taxes withheld are reported on your return as a tax payment. The taxable amount distributed is entered on your tax return as ordinary income.
The early withdrawal penalty is assessed on the federal tax return as a tax liability.
You have 60 days to rollover the funds. If you keep the money, you pay regular income tax plus a 10% penalty. If you roll over the funds to a Roth IRA, you pay income tax but no penalty. If you rollover the funds to a traditional IRA, it’s tax and penalty free.
it's not tax and penalty free if the employer withholds tax
the employer should not withhold any tax if they are closing out your 401k.
@fanfare wrote:
it's not tax and penalty free if the employer withholds tax
the employer should not withhold any tax if they are closing out your 401k.
I'm not clear if the regulations always require withholding, but;
If, for example, the distribution is $1000 and the employer withholds 20% backup withholding, so the employee gets a check for $800, the employee must nevertheless deposit $1000 in the new IRA to consider the rollover to be completed. Then, there would be no penalty. Tax would be owed if the rollover was into a Roth but not if it was into a traditional IRA. If the withholding is more than the tax, the difference gets added to the persons tax refund.
However, if the employee only deposited $800 in the new IRA, then it would count as an $800 rollover and a $200 taxable withdrawal. The employee would pay tax and a penalty on the withdrawal amount, and would only pay tax on the rollover amount if it was to a Roth IRA.