topic Thank you! in Retirement tax questions

Rolling over 401ks to an IRA

egirl — Thu, 06 Jun 2019 13:49:40 GMT

I am looking to get access to some of my 401k dollars as I may want to take a partial early withdrawal. I was advised I could roll over to an IRA and then take what I need as a withdrawal from the IRA. What are the penalties associated with this and what are the other options? (Note: I am currently in talks for a new position but currently unemployed so a rollover to an employer 401k and then a loan is not an option at this time.)

There are no taxes or penalties on a rollover to a Tradit...

macuser_22 — Thu, 06 Jun 2019 13:49:42 GMT

There are no taxes or penalties on a rollover to a Traditional IRA. You should have the 401(k) administrator make a trustee-to-trustee rollover to avoid mandatory 20% tax withholding on a 401(k) distribution. You would receive a 1099-R for the year that the rollover took place with a code "G" in box 7 if it is a trustee-to-trustee rollover.

Any distribution from the Traditional IRA would be taxed as ordinary income and subject to a 10% early distribution penalty if under age 59 1/2.

Thank you. Noted about how to not have the 20% withheld....

egirl — Thu, 06 Jun 2019 13:49:43 GMT

Thank you. Noted about how to not have the 20% withheld. I am looking to understand what penalties there are when I withdraw said rolled over money from that IRA.

Like I said in the answer, other then the normal tax, the...

macuser_22 — Thu, 06 Jun 2019 13:49:45 GMT

Like I said in the answer, other then the normal tax, the only penalty on a Traditional IRA distribution if a 10% early distribution penalty if you are under age 59 1/2 and do not qualify of one of the exemptions to the penalty.

There are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 59½, you may not have to pay the 10% additional tax if you are in one of the following situations.

    You have unreimbursed medical expenses that are more than 10% (or 7.5% if you or your spouse was born before January 2, 1952) of your adjusted gross income.

   - The distributions are not more than the cost of your medical insurance due to a period of unemployment.
   - You are totally and permanently disabled.
  -  You are the beneficiary of a deceased IRA owner.
   - You are receiving distributions in the form of an annuity.
   - The distributions are not more than your qualified higher education expenses.
   - You use the distributions to buy, build, or rebuild a first home.
   - The distribution is due to an IRS levy of the qualified plan.
   - The distribution is a qualified reservist distribution.

Except for a few differences in available early-distribut...

dmertz — Thu, 06 Jun 2019 13:49:47 GMT

Except for a few differences in available early-distribution penalty exceptions between 401(k) distributions and IRA distributions, the liability and penalty will generally be the same either way.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions">https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions</a>

Thanks so much. I totally missed seeing that information...

egirl — Thu, 06 Jun 2019 13:49:49 GMT

Thanks so much. I totally missed seeing that information in the original comment. Thank you for your expanded answer here as well! Appreciate it.

And as dmertz said, the tax and penalties are virtually t...

macuser_22 — Thu, 06 Jun 2019 13:49:50 GMT

And as dmertz said, the tax and penalties are virtually the same whether you roll the 401(k) into Traditional IRA and then take distributions from the IRA or if you just leave the 401(k) and take distributions from that.

Some people prefer an IRA because of more feasibility in investment choices, but the tax treatment is almost identical except for minor differences in the exceptions to the penalty.

Thank you!

egirl — Thu, 06 Jun 2019 13:49:52 GMT

Thank you!