Will I still have to pay taxes on 401 k money refunded to me even if I didn't request that it be cashed out?

Question

I have had a check come to me from a previous employer for 401k money that was automatically taken out of my check during my employment. Will I be taxed on this money even though I didn't request that it be cashed out? How can I avoid this?

Answer 1

How long ago did you receive the check? Did the employer withhold any taxes?

Generally, when you leave a company, you can either take the money and run, leave the money with your employer (they are allowed to send you a check if it's under a certain amount), or you can do a rollover either to another company plan or to an IRA.

Since your employer sent you a check already, you have two options:

1. Keep the money, or
2. Do a rollover to an IRA or to a new qualified retirement plan

If you decide to keep the money, you will pay income taxes on the amount of the distribution (federal and state, unless you live in a state with no state income tax), plus, if you are under age 59 1/2, you will pay an additional 10% penalty on top of the income taxes. Depending on what tax bracket you fall in, your total taxes could be up to 50%.

Your second option is to roll this money into an IRA or a new company retirement plan. However, you only have 60 days from the date you receive the check to roll it into a new account. If you don't complete the rollover within this 60-day time period, you will owe income taxes and the 10% penalty (if you are under 59 1/2) on the entire amount of the distribution.

One problem with the 60-day rollover is that your employer probably withheld income taxes from the distribution you received. Employers are required to withhold 20% for federal income taxes when funds are paid directly to the 401K participant. So, if you had $1,000 in your 401K, chances are you received a check for just $800.

If you decide to do a 60-day rollover, you will need to roll the entire amount of the distribution, including the income taxes withheld, to avoid paying taxes and penalties. Example: if your 401K had $1,000 when you left your job, and you only roll $800 into an IRA, you will pay taxes and penalties on the $200 that was withheld by your employer. So, if you decide to do a rollover, you will need to roll the amount you received, plus the amount withheld from your employer to avoid taxes and penalties.

Unfortunately, it doesn't matter that you did not request the check. But the good news is that you can avoid the taxes and penalties as long as you have not held the check for more than 60 days and you are willing to roll the money into an IRA or other qualified retirement plan.

Hope this helps!

Answer 2

yes u have to pay taxes. In the adoption agreement or summary plan description for that 401(K) plan they most likely have a Mandatory cashout provision. It is usually $5,000 or less. If you had less that $5,000 then they can send you a check less Federal withholding and you will have to pay taxes on it. If it is more than $5,000 then they should have contacted you to give you an option. And you can roll it into a new plan or into an IRA. Since they already sent you the check they should have withheld at least 20% so it will be harder to change anything now because the withholding would have already been sent to the department of treasury.

If the check has already been issued to you you probably cannot avoid paying taxes on it. Call the company and speak with them. Maybe they did not withhold or have not sent in the withholding yet. If so you may be able to roll the money into a new plan with a new company or into an IRA which is not taxable.

Answer 3

You can roll it over into a rollover IRA and avoid paying current taxes on it. You have a limited time to do this, I believe it's 60 days.

If you don't roll it over, you'll be stuck with the tax, plus a 10% penalty if you're under age 59-1/2.

Answer 4

yes..the check was prob under 5k thats why they sent it to you....you have 60 days to get it into a similar investment account...if not you will be taxed and possible penalties..but you will want to check with your past employer to see if taxes may have already been withheld from it..your best bet is to seek the advcie of a financial advisor..or accountant