What kind of penalties and fees can I expect to pay when rolling a 401(k) over into a new retirement account and withdrawing $4,000 in the process?
I have a 401(k) with a previous employer that I plan on transferring to a financial institution closer to me. Is it possible to withdraw about $4,000 and deposit the rest into a retirement account, and if so, what kind of penalties and fees can I expect to pay?
Generally speaking, you will owe a 10% penalty on the withdrawal plus Federal income taxes (at your marginal tax rate) and perhaps state income taxes (it depends on your state of residence). You can avoid the 10% penalty if you are over 59.5 years old (or, for some plans, 55 or older when you separated from employment with the previous employer).
There are a few IRS-approved withdrawal reasons that avoid the penalty (but not the tax!): 1. Paying unpaid medical bills; 2. Disability; 3. Health insurance premiums if you're unemployed; 4. Death (probably doesn't apply to you!); 5. IRS collections; 6. First-time homebuyer (if the withdrawal is after the funds are in an IRA instead of the 401k); 7. Higher education expenses (if the withdrawal is after the funds are in an IRA instead of the 401k; and 8. "72t payments" every year (not just the one-time $4,000 withdrawal you mentioned). Here is some more info you may find helpful.
Some plans do assess a small fee for processing the distribution. Please check with your plan administrator to verify the amount, if any apply.
I hope this helps! Please follow up with me if you have any other questions.
If you are under the age of 59 1/2, you can expect to pay taxes plus a 10% penalty on the amount that you withdraw that is not moved into a qualified account. Unless you absolutley do not have any other way of piecing together the $4,000 than I would advise against doing this. Not to mention you lose the future compounded growth on this money.
Hope this clarifies some things.
You may roll over your 401(k) to another retirement account with no penalties or fees. However, you would be responsible for taxes on any funds taken out of your retirement account. If you are under the age of 59.5 then you would also have a 10% early withdrawal penalty.
According to the IRS, funds contributed to investment vehicles such as IRAs are locked into the investment until the money matures. Money in these accounts mature when the investor turns 59.5 years of age. Any and all funds taken out of these accounts prior to 59.5 are subject to a 10% early withdrawal penalty fee in addition to any income tax incurred by the withdrawal.
The following are specific circumstances that will allow exceptions to the 10% penalty under IRS Section 72t:
- Age 59.5
- Upon death paid to the beneficiaries
- Series of substantially equal periodic payments (SEPP)
- Certain qualified medical expenses
- Health insurance premiums
- Qualified higher education expenses
- First-time home purchase
Read more: Income Taxes and Your Retirement Accounts.
If done correctly, the money that you rollover from your old 401(k) to your new retirement plan will not be taxable and will not be penalized (as long as you roll into a traditional qualified retirement account, and not a Roth). Make sure this is done as a "Direct Rollover" to avoid any reporting issues. The $4,000 distribution will likely be taxable, but will only be penalized if it is a premature withdrawal (usually prior to age 59 1/2, but with some exceptions).
Your retirement 401k account from a previous employer can be rolled over into your new employer's 401k or into a rollover IRA. Many people choose to rollover into an IRA since it provides more flexibility for investment options. You would likely have an easier time withdrawing $4,000 from the IRA than going from 401k to 401k. The challenge is the tax liability. You will have to pay tax on the money and if you are under 591/2, you will also have a 10% penalty. If you want to net $4,000, you will need to factor in your tax bracket plus the 10% penalty if you are under the age mentioned above. So if you were under 591/2 and in a 24% tax bracket plus the 10% penalty, you would need to withdraw $6,060.61 to net $4,000. Another option that might be available, is a loan from the 401k. The rules are as follows: you can withdraw up to 50% of the account value not to exceed $50,000. You have to pay it back but you can take up to 5 years for repayment. If you miss a payment, you are then taxed plus potenial penalty on the unpaid balance.