Rollover 401(k) into an IRA - The Bills.com Blog

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Rollover 401(k) into an IRA

Wednesday, Jan 6, 2010

Question: The company I work for was recently bought by someone else. The new owner is not offering a 401K. I am 49 years old and wish to cash in my 401K earnings from the previous employer. I realize I will need to pay the 10% early withdrawal penalty. It is also my understanding the payer of my 401K (Mass Mutual) will deduct the 20% federal taxes from my 401K earnings and I will only receive what is left. When I file income taxes, will I then be taxed again on the entire amount of the withdrawal or the remaining portion of the withdrawal even though the funds were already taxed at 20%? In other words, will I be subjected to double taxation on the withdrawal? Thank you.

Answer: I urge you to think twice before taking distribution from your 401(k). As you mentioned, the distribution amount will be subject to the 10% penalty tax, which will be withheld by the administrator before you receive
the distribution. Second, you will need to show the distribution on your 1040 for the tax you receive the distribution, and will need to pay income taxes on the amount received. The amount will be shown on a 1099-R that you will received from the 401(k) administrator. Alternatively, you can tell the administrator to withhold your tax rate from the distribution so that the tax is pre-paid.

In either event -- your 401(k) administrator withholding the proper amount or not -- you will not be subject to the double-taxation that you described.

Rollover

Instead of taking a distribution, I urge you to consider rolling your 401(k) into an IRA. If you roll the balance of the 401(k) into an IRA, you will pay zero dollars now in penalties or taxes. You can move these funds into an account type of your choice, such as CDs, money market, an fund at a brokerage that either you or a stock broker control -- really you are only limited by your imagination. See the IRS document IRA Online Resource Guide - Information About Rollovers to learn more about the rollover rules.

I hope this information helps you Find. Learn & Save.

Best,
Bill
www.bills.com/blog/

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