20% Mandatory w-holding for 401k distribution?

[BBQ-Nut]

So, I may or may not need a distribution from my 401k later in 2015.

I called the plan administrator where I use to w*rk to confirm for a third time that I would not be subject to the 10% "early" withdrawal because of the Rule of 55 provision of the modified plan.

I was told no, I would not be - but that any partial distribution would still be subject to a "mandatory" 20% Fed tax withholding.

Does that jive with those that are receiving partial/installment distributions from their 401ks?

 

[MRG]

Yep exacty what happened to me. I can ask for more to be witheld. It's federal only no state withholding.

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[daylatedollarshort]

Yes, from Fidelity we have 20% withheld from former employer 401K distributions. If there is a way around it we have not discovered it yet. The only thing we have learned to do is not pay as much as we normally would have in quarterlies for the hobby business income to reduce the total amount withheld.

 

[GrayHare]

If older than age 59.5 what about rolling all/some of the 401k into an IRA, then withdraw from there? AFAIK IRAs are not subject to mandatory withholding.

 

[rbmrtn]

I was told no, I would not be - but that any partial distribution would still be subject to a "mandatory" 20% Fed tax withholding.

Does that jive with those that are receiving partial/installment distributions from their 401ks?

it's an IRS rule, 401(k) Resource Guide - Plan Participants - General Distribution Rules

Any taxable amount that is not rolled over must be included in income in the year you receive it. If the distribution is paid to you, you have 60 days from the date you receive it to roll it over. Any taxable distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll the distribution over later.

 

[HFWR]

I normally don't like to loan the guvment money, but having taxes withheld from my 401k, pension, and SS keeps me from having to hassle with quarterlies. The price of sloth...


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[jim584672]

Roll into IRA, withdraw as needed.

IRAs
What is my withholding percentage?
IRS regulations require Fidelity to withhold federal income tax at the rate of 10% from your total withdrawal unless your withdrawal is from a Roth IRA, or unless you elect otherwise. You can change your tax withholding percentage by entering any whole number between 10 and 99 or by electing not to have federal tax withheld (provided that you have supplied Fidelity with a U.S. address).

 

[BBQ-Nut]

So, I am 'only' 55 and was planning on using the Rule of 55 to access my 401k until 59 1/2 when I have access to an existing tIRA, then roll the remaining 401k out to a tIRA.


Until then, I guess I will do expense and tax planning based on the 20% withholding between 55 and 59 1/2 which will then be a mandatory 10%.


As long as I understand the 'rules' I can work with that.


Thanks!

 

[kaneohe]

it's an IRS rule, 401(k) Resource Guide - Plan Participants - General Distribution Rules

Any taxable amount that is not rolled over must be included in income in the year you receive it. If the distribution is paid to you, you have 60 days from the date you receive it to roll it over. Any taxable distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll the distribution over later.

The key words are bolded above.....PAID TO YOU..........so either have a direct transfer, if possible, between Qualified Plan and IRA custodians or have check made out TO IRA CUSTODIAN sent to you. You probably want to verify what will happen w/ withholding in either case.

I guess that still leaves the 10% EWP on the IRA withdrawal though.

 

[BBQ-Nut]

So I need the partial distributions paid to me for now - the rule of 55 is what allowed me to FIRE. So I will give Uncle Sam his required tribute.


When I do roll over the balance of my 401k to my tIRA I will do the direct transfer to my Fidelity tIRA account.

 

[Dwhit]

I am 57, and withdrawing from my 401 k till I can access the IRA. My custodian withholds 25% (20% Federal and 5% State), plus a small transaction fee. So, BBQ-nut, you may want to check on any State witholdings

I am looking at a good refund from the state and Feds, but
Like you, I will definitely close out the 401k and roll over to an IRA when I hit 59 and one half.

 

[jim584672]

So I need the partial distributions paid to me for now - the rule of 55 is what allowed me to FIRE. So I will give Uncle Sam his required tribute.

At least you will get it back in time. Just a major hassle.

 

[jfn111]

I'm also doing pre 59 1/2 withdrawals from my 401K. I didn't mind the 20% Fed withholding but I had to manually get the Fidelity system to withhold State tax.

 

[karluk]

I started a thread last year that touched on this topic, based on my personal experience that the 20% mandatory withholding applies to one time distributions from my retirement account, but not to the regularly scheduled monthly distributions that I started in January, 2014. As usual, the tax laws are sufficiently complicated and confusing that we had a little debate about the exact reason for the difference in withholding rules, but the basic conclusion holds - there are ways around the mandatory 20% withholding if you take your distributions on a regularly scheduled basis. You might want to contact your 401k plan administrator and see if their rules allow you to schedule periodic distributions in a way that bypasses mandatory 20% withholding.

http://www.early-retirement.org/forums/f28/tax-wrinkle-ira-rollovers-72422.html

 

[kimcdougc]

Our 401K is one of those lovely plans with Megacorp where we can't use the rule of 55. We get to roll it all over to an IRA. We get to do an NUA instead. Taxes will be at 39% which we will recover some of it back in the next 2 1/2 years since we won't have any income but living off of the money we get from the NUA.

 

[MRG]

Our 401K is one of those lovely plans with Megacorp where we can't use the rule of 55. We get to roll it all over to an IRA. We get to do an NUA instead. Taxes will be at 39% which we will recover some of it back in the next 2 1/2 years since we won't have any income but living off of the money we get from the NUA.

Is the NUA on equities? That's the only way I personally have seen NUAs handled. If it's funds I'd love to hear any details you could share.

Sorry to hear about not being able to use the 55 rule. Happens far too often, IMHO. It's been my plan B from 56-59.5.

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[kimcdougc]

Is the NUA on equities? That's the only way I personally have seen NUAs handled. If it's funds I'd love to hear any details you could share.

Sorry to hear about not being able to use the 55 rule. Happens far too often, IMHO. It's been my plan B from 56-59.5.

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Hi MRG. The way the NUA was explained to me is first you have to retire from a company and be 55 or older. You have to have company stock in your account. With that stock you can take an NUA on that company stock and only have to pay taxes on the cost basis as ordinary income. The amount that the shares have made above and beyond the cost basis is then taxed at the favorable capital gains rate. This is a one time deal. Since the 72T rule would not give us enough $ to live on we are doing this.

Our tax bite should be around $112,000. Hate that it is so much but worth it to get DH in a much better mental place.

 

[MRG]

Thanks kimcdougc,
That's how I understood it as well. I now wish I had held on to the ESOP until I retired, but I was so top heavy in Megacorps stock, it kept me up at night.

Good luck, folks I've known that were able to NUAs were pleased.

 

[Hermit]

One thing I did not see mentioned in this discussion is that your money is better protected from lawsuits, etc. in a 401k. I don't know how much that protection might be worth. I will keep my money in the 401k as long as possible and do withdrawals at the end of the year, but I'm over 60 and I don't need the money for immediate living expenses.

 

[Sunset]

So, I am 'only' 55 and was planning on using the Rule of 55 to access my 401k until 59 1/2 when I have access to an existing tIRA, then roll the remaining 401k out to a tIRA.

Until then, I guess I will do expense and tax planning based on the 20% withholding between 55 and 59 1/2 which will then be a mandatory 10%.

As long as I understand the 'rules' I can work with that.
Thanks!

You could also transfer your 401K into 2 rollover IRA's and then do the 72T rule on one of them (leaving the other to keep flexibility), you would have to follow the 5 yr rule, but you are almost young enough that it makes no difference anyhow.

 

[scrabbler1]

Hi MRG. The way the NUA was explained to me is first you have to retire from a company and be 55 or older. You have to have company stock in your account. With that stock you can take an NUA on that company stock and only have to pay taxes on the cost basis as ordinary income. The amount that the shares have made above and beyond the cost basis is then taxed at the favorable capital gains rate. This is a one time deal. Since the 72T rule would not give us enough $ to live on we are doing this.

Our tax bite should be around $112,000. Hate that it is so much but worth it to get DH in a much better mental place.

You don't have to be 55 to use NUA. I was only 45 when I left MegaCorp and cashed out my company stock. I paid income taxes at ordinary rates on the cost basis and used NUA on the rest. The NUA was about 97% of the stock's value so my overall (federal) tax bite was about 15% (LTCG). I did pay the 10% early withdrawal penalty on the relatively tiny cost basis part.

 

[MRG]

At least you will get it back in time. Just a major hassle.

Jim I don't understand. I'm of the impression I get overpayment back at the end of the year. Is there something else that I'm missing. Yes I understand they have my money interest free.

Is there something else that makes it a hassle? Thanks.

 

[jim584672]

Jim I don't understand. I'm of the impression I get overpayment back at the end of the year. Is there something else that I'm missing. Yes I understand they have my money interest free.

Is there something else that makes it a hassle? Thanks.

Just meant you need to file and get it back, nothing more. Sorry for not being clearer on this.

 

[MRG]

Thanks, I'm not the most confident person about taxes. I understand. Thanks.

 

[supernova72]

Hmm...I just called our 3rd party retirement office for the Megacorp I work for and asked this specific question. I also asked about fed withholding on my pension. He said it was up to me if I wanted taxes to be withheld for the rule 55 401k withdraws and the pension.


Maybe it's up to the plan admin office (Xerox HR solutions just took ours over for the 401K). On the pension the rep said "it's just like a paycheck and you turn in a W-4P form if you want something different than default 20%".


I live in WA so no state tax here. Not ER yet but am 54 yrs old.