I have to dissolve my 401k after a move

[Brady]

It's about 30k. Unfortunately, I need to. Is there a way to cut the massive tax hit? And does it matter if I'm in NC now, as compared to NY, where I moved from? 

[macuser_22]

What do you mean by "dissolve"?

401(k) distributions are taxed (Federal) as ordinary income at your margional tax rate and there might be n additional 10% penalty if under age 59 1/2.

If there is also a state tax then the state you lived in at the time of the distribution should tax it.

[Brady]

I am 45 years old. I have to take in its entirety, the 401k. There's about 33k in there. I'm aware that it is considered earned income and taxes will be taken as such. I'm also aware of the 10% early withdrawal penalty. I now live in NC where taxes are lower than NY, where I moved from. Is there any way to determine what the full penalty amount would be before I make this choice? And is there a smart choice to make with regards to any money left over that I do not need immediately? Any advice would be appreciated. 

[VolvoGirl]

First of all a withdrawal will be taxable but it is not earned income.  Any amount you don't need can be rolled over to a IRA within 60 days.  A rollover to a Traditional IRA won't be taxable.  So try to put it all or a lot of it into the IRA.

[Brady]

Thank you. That was my intent. To transfer to an IRA money market, and take distributions when I need them. Is that what you're referring to, or something similar? I thought that might be the best way to save a huge penalty. Originally, when I referred to dissolve, I thought I'd have to take the full amount. A banker friend suggested a trustee transfer. It seems you're saying the same, so that's what I'll do. I'll check back here too see if there are more responses

[VolvoGirl]

Yes try to have the 401K plan transfer it directly to the IRA.  Then they don't need to take tax withholding out.  Then you can take Distributions from the IRA.  

[macuser_22]

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@VolvoGirl wrote:

Yes try to have the 401K plan transfer it directly to the IRA.  Then they don't need to take tax withholding out.  Then you can take Distributions from the IRA.  

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If you left employment or the plan discontinued the plan, they cannot force you to take a distribution, they are required by law to offer you the choice to roll it into an IRA with a direct trustee-to-trustee transfer.    Ask the plan administrator (not your employer)..

[Mike9241]

why do you think you have to dissolve it? 

you should be able to roll over the 401(k) to an IRA without taxes or penalties.  however, since you provided no information there may be no reason you have to dissolve or move it to another tax-deferred a/c. 

[Opus 17 · Accepted solution]

For reasons that I won't go into (but trust me 😉), you want to do this in two steps.  First, perform a direct rollover (trustee-to-trustee transfer) to a traditional IRA.  You can set up an IRA account at most banks and brokers, although your investment options will vary depending on where you invest.  A direct rollover is not taxable.

Then second, if you need funds for an emergency, you can withdraw part or all of the funds from the IRA.  Any amount you withdraw will be subject to regular income taxes plus a 10% penalty for early withdrawal, unless you meet one of the penalty exceptions.  Any funds you can afford to leave in the IRA will continue to grow on a tax-deferred basis.  

[Critter-3]

Yes ... trustee to trustee transfer is the way to go ... this should be an option on the 401K distribution forms they send you ... open the IRA and let the plan administrator  make the transfer for you ... they do it all the time. 

[Brady]

I moved to a new state, and my savings are depleted. So the intent is to do a direct transfer from 401k to an IRA money market, and take distributions as necessary. This is my only recourse at the moment. 

[Opus 17]

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@Brady  wrote:

I moved to a new state, and my savings are depleted. So the intent is to do a direct transfer from 401k to an IRA money market, and take distributions as necessary. This is my only recourse at the moment. 

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Unfortunately, unemployment or moving, by themselves, are not an exception to the 10% early withdrawal penalty.  However, if you are unemployed for at least 12 weeks, and use the IRA funds to pay for health insurance premiums (under COBRA from your previous employer or a private health insurance plan), then the part of the IRA withdrawal that you use for the premiums will be exempt from the 10% penalty.  You will have the ability to report this in Turbotax when you file your return.