Comments on: Former Employer Closed Out My 401(k)

By: Weekend Roundup - Target Toy Clearance Edition | Not Made Of Money

Weekend Roundup - Target Toy Clearance Edition | Not Made Of Money — Sun, 18 Jan 2009 14:48:09 +0000

[...] Tight Fisted Miser’s former employer closed out his 401(k). [...]

By: Andy Hough

Andy Hough — Sat, 17 Jan 2009 22:18:59 +0000

Everyone- Thanks for the advice. I think I’ve got it handled.

By: Corrie @ "Cents"able Momma

Corrie @ "Cents"able Momma — Sat, 17 Jan 2009 03:48:37 +0000

You’re fine putting the money into a Roth IRA, since it was within the 60 days after the distribution. Like you said, you will pay the tax on the money, but you should avoid the penalty, since a Roth is a qualified plan.

By: Jim

Jim — Fri, 16 Jan 2009 21:21:46 +0000

Two seperate issues – tax and penalty. I was bitten by this a few years ago. It doesn’t matter that you did not initiate the transaction.

If you don’t put the money into an IRA within 60 days of when you recieve the check you will owe a penalty. The 401k people will send you a statement (with a copy to the IRS) at the end of the year. When you fill out your tax forms it will ask you if you rolled the money over within the 60 day deadline or not.

Tax – if you put the money in a normal IRA you don’t owe tax. You don’t have to create a special IRA for this … you can use the normal IRA you already have (if you already have one).

Not sure about putting it in a ROTH IRA in a single step.

I know you can create a normal IRA account just for the rollover, and then convert that IRA into a ROTH.

It’s only $175 so the amounts are small – but it’s no fun to pay a penalty if you don’t have to.

By: spaces

spaces — Fri, 16 Jan 2009 20:14:53 +0000

You’re going to owe tax if you don’t put it in a tax deferred retirement account within I think 60 days (Roth does not count — its not tax deferred).

But you may be able to get out of the penalty by using the money to fund your education. The law is pretty flexible on this, rent, utilities, etc. count as educational expenses that will shield 401(k) $ from the penalty (in addition to tuition and fees of course). IIRC, this is called a hardship distribution.

Here, I would treat the $ as fungible — treat it as if you paid some education expense with the $175, and put some other money into your Roth.

By: Andy Hough

Andy Hough — Thu, 15 Jan 2009 19:44:38 +0000

I’ve put the money in my Roth IRA as a 2009 contribution. I’ll have to declare the $175 as income but I should avoid the early withdrawal penalty. If I’m wrong the taxes and penalties shouldn’t be much on $175. Since this is such a small amount it wasn’t worth setting up a rollover IRA.

By: Dividend Growth Investor

Dividend Growth Investor — Thu, 15 Jan 2009 15:44:01 +0000

Sorry for the stupid question, but in this situation what account should TFM invest the $175 in order to avoid paying a penalty ( A rollover IRA i guess?)

By: Pinyo

Pinyo — Wed, 14 Jan 2009 20:53:27 +0000

You will have to pay 10% early withdrawal penalty if you don’t deposit the full amount into a qualified retirement account in 60 days.