If I have my 401k money distributed in a check, how am I taxed?

Question

I know that they take a % out for the federal government when they cut the check, but could I incur more penalties when I file my tax return for '07. Would it be better to put the money in an IRA when I get it? I am going to be a stay at home mom now and I can't roll it over to another 401k plan.

Answer 1

read through the answers and some have it right, some don't, and some have it part right.

If you elect a direct rollover, the check will be made out to the institution that you are rolling it over to. You will get 100% of your vested balance rolled over. YOu will not incur any penalty. The front page of the 1040 that you file will need to show the distribution amount but then right next to it is the taxable amount. You put a zero there.

If you don't request a direct rollover, they will automatically withhold 20% from your distribution and make the check payable to you. You then have 60 days to rollover that amount PLUS the 20% withheld (you'll have to come up with the difference out of your own pocket). The amount that doesn't get rolled over will be subject to a taxation and an additional 10% excise tax that gets assessed when you file your taxes for that year.

The withholding is no different than the withholding from your regular paycheck...simply a prepayment of your taxes. The government fixed it at 20% for everyone though.

If you don't need it then either leave it (they can't force you out if the balance is over $5,000) or roll it over. Do not take it in cash unless you absolutely need it. And if your balance is over 5,000 and the funds that you have available in your old 401k are good...I'd leave it there.

People are quick to say roll it, roll it! But, if you don't have a lot of money, you are limited to the funds that you can put it in. In essence forcing you into Vanguard, American, TRowe, or Fidelity. Sometimes the better funds are in the plan where you are at and "theoretically" your old company is monitoring the funds performance so you don't have to.

So, if you don't need it...leave it. If it's over 5k then leave it and take your time doing research. If it's under 5k then do your research quickly and focus on the companies listed above. It does absolutely no good to take a distribution and then find out that your balance doesn't meet a minimum so it has to sit in a mm. Better to put it in a CD at an IRA at your local bank.

Answer 2

The best option is to have the 401k cut a check directly to a new IRA. No Tax, penalty.

If they have already cut the check, you can deposit it in to a new IRA and avoid the tax and penalties on the net distribution.
This is where it gets tricky: You also have to cover the 20% withholding to avoid the tax and penalty on that portion. For example, if you had $5000 in a 401k and you took a check, you would only receive $4000. To avoid all taxes and penalties, you would have to come up with another $1000 to cover the $1000 that they withheld. You would get the $1000 withheld back when you file. Fun isn't it.

If you just cash the check, you will pay federal tax, state tax (if applicable) and a 10% on the gross distribution. Many people say goodbye to almost half of their 401k when they choose this option.

Answer 3

When you take the money they will take out 20% for federal taxes and whatever state taxes apply (for MA it is 5.4% as an example) then there is a 10% penalty for early withdrawal if you are under age 59 1/2. So you are giving up almost half of your money. If you roll it over to an IRA there are no tax penalties until you withdraw the funds.

It is always better to roll over, not only for the tax consequences but because then you still have it when you get ready to retire. That's the point of putting it there to start with.

Roll it to an IRA and then contribute as much as you can each year. I know that's hard as a SAHM, but anything that you contribute will help you in the future.

Answer 4

You will incur an early withdrawal penalty when you file your taxes. The penalty will depend on what tax bracket you are in. You'd be better off to roll that 401k into an IRA. You have 60 days to do that from the time you take the distribution.

Answer 5

definitely roll it over to an IRA so you can retain the tax-deferral. it's better to have it in an IRA instead of rolling it over to another 401k since you have more control over how you invest the money if it is in a IRA. take a look at vanguard or fidelity for good IRAs.

Answer 6

Roll it into an IRA with a local brokerage. Otherwise you will lose about half of it in taxes & penalties, which is just dumb.

Ask your (former?) employer for the paperwork to do a "direct rollover", then no taxes will be withheld at all...

Best wishes...

Answer 7

in case you rollover right now into the IRA, there is no tax implication. Upon withdrawal, once you're on the right age, you should pay the taxes on the useful factors. you may't use this money to fund a accepted contracting organization. Nope. in case you try this, you should pay huge consequences. do not try this. the money it truly is contained in the 401(ok) or the IRA must be considered untouchable till retirement. in case you want to take a private loan hostile to it, then go away it contained in the 401(ok) in case you may. If this is along with your cutting-edge agency, you're able to take a private loan hostile to it. verify along with your plan administrator. you may't borrow hostile to an IRA and frequently can't borrow hostile to a 401(ok) from a former agency. in case you may't borrow hostile to a cutting-edge-agency 401(ok), which i assume you may't once you try to commence a organization, then you truthfully'd extra effective locate yet differently to get a organization mortgage.

Answer 8

We were told at work if we took our 401k and didn't roll it into another retirement account, to figure with penalties, that you would lose approximately 40%. Sucks doesn't it?