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401k to IRA rollover problem
Old 01-04-2007, 09:01 AM   #1
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401k to IRA rollover problem

Hey gang, I figured I'd run this by you all and see what you think.

The company my uncle works for recently got sold and disbanded, and he now works for a new employer. He got a notice from his old employer saying that the 401k was going to be eliminated as well, so he had to either roll it over into an IRA or cash it out. He chose to roll it over. But the other night, he got a check in the mail for his entire 401k balance, minus about $19,000 in taxes. So instead of rolling it over, they accidentally cashed it out!

One of my friends said that if the witholdings for taxes have already been taken out, it might not be possible to get the company to undo their mistake and and set things right. However, he did suggest this route...

Write out a check for the original 401k amount, before taxes were taken out, and put it into an IRA. This means he'd have to borrow some money to make up that $19,000 difference, but between me and my grandma, we could cover him. Then, when he does his income tax, claim the $19,000 as an overpayment on his taxes, which will then be refunded to him. And then use that refund to pay back grandma and me.

So would something like that work?
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Re: 401k to IRA rollover problem
Old 01-04-2007, 11:12 AM   #2
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Re: 401k to IRA rollover problem

In order to avoid the 10% penalty as well as the income tax consequences, he will need to deposit the entire face amount of the 401k into an IRA within 60 days of distribution.

Your suggested approach of lending him the $19k and have him repay once he receives his tax refund will work fine. Hope this helps.
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Re: 401k to IRA rollover problem
Old 01-04-2007, 11:25 AM   #3
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Re: 401k to IRA rollover problem

cool, thanks for the reassurance, Roadkill. As for the 10% penalty, they didn't hit him with that for some reason. He turns 55 on September 26 of this year, so could that be the reason? I think I read somewhere that if you leave your company within a year of turning 55 (or older) that you won't get hit with the penalty.
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Re: 401k to IRA rollover problem
Old 01-04-2007, 01:17 PM   #4
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Re: 401k to IRA rollover problem

The way it works is that if the company doesn't do a direct rollover into the IRA, they have to withhold 20% for taxes.They don't withhold the penalty. Follow roadkill's instructions and get all the money into the IRA within 60 days.
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