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401K withdrawals and federal taxes (any accountants out there?)
Old 10-28-2013, 08:20 AM   #1
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401K withdrawals and federal taxes (any accountants out there?)

I retired after age 55, and am eligible to withdraw from my 401K without penalty. I have done that (up to the 15% tax rate) for the past 2 years. My fund company takes 20% federal taxes out of these withdrawals. I asked them about it, and they said they are required to. Yes, I get the surplus back at the end of the year, but I'm not big on making interest-free loans to the gummint. Has anyone else run into this? I'm still not 59-1/2, so I'm wondering if this is only because I haven't reached that threshold.
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Old 10-28-2013, 08:24 AM   #2
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I fill out a form W4P and send it to the 401k company (T Rowe Price) and they withhold what I tell them to for my post 55 401k withdrawals. They never said they had to withhold 20%. It sounds like they have flawed internal policy.
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Old 10-28-2013, 08:26 AM   #3
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I think you're stuck with the withholdings. From IRS 401(k) Resource Guide - Plan Sponsors - General Distribution Rules

Quote:
Any taxable amount that is not rolled over must be included in income in the year received. If the distribution is paid to the participant, he or she has 60 days from the date received to roll it over. Any taxable distribution paid to a participant that is eligible for rollover is subject to mandatory withholding of 20%, even if the participant indicates that he or she intends to roll the distribution over later.
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Old 10-28-2013, 09:12 AM   #4
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Originally Posted by Brett_Cameron View Post
I fill out a form W4P and send it to the 401k company (T Rowe Price) and they withhold what I tell them to for my post 55 401k withdrawals. They never said they had to withhold 20%. It sounds like they have flawed internal policy.
This is interesting.......as pb4uski said, my impression was that distributions from 401Ks had mandatory 20% withholdings if they were eligible for rollover.
I know that 401K RMDs can have zero withholding but they are not eligible for rollover so that is entirely consistent pu4uski's link.

Not necessarily recommending it.......but for OP, if you did a direct transfer of 401K to IRA, IRA distributions don't have that mandatory withholding.....but you'd have to worry about getting IRA distributions out before 59.5 w/o penalty(72t) and loss of the 401K creditor protection.
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Old 10-28-2013, 09:28 AM   #5
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cj,

In my 401k SPD it allows penelty free withdrawls at 55, and terminated from service. In the SPD it says 20% withholding. Not sure there's any way around it.

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Old 10-28-2013, 09:29 AM   #6
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Originally Posted by kaneohe View Post
.....loss of the 401K creditor protection.
I thought a rollover IRA had the same creditor protection as a 401K? It was the regular IRA's that were only to 1 million (?).
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Old 10-28-2013, 09:49 AM   #7
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I thought a rollover IRA had the same creditor protection as a 401K? It was the regular IRA's that were only to 1 million (?).
401Ks have (almost) unlimited protection in all situations(except IRS and QDRO). TIRA have (almost?) unlimited protection but you have to file successfully for bankruptcy to be covered. Not sure there is any practical difference if you get in a really bad situation but one sounds better to me..........
http://online.wsj.com/news/articles/...81801239401917

When you read these articles , you need to keep in mind:
federal vs state law; bankruptcy or non-bankruptcy situation

http://www.marketwatch.com/story/11-...6?pagenumber=2

http://www.latimes.com/la-ira-story3...#axzz2j1tWCBlz

http://www.nolo.com/legal-encycloped...alifornia.html
comment: this is an interesting article.....the first that I've seen that suggests that rollovers from ERISA plans apparently may maintain their protection in an IRA......
I would want to confirm somehow before doing anything tho.
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Old 10-28-2013, 12:56 PM   #8
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Originally Posted by kaneohe View Post
This is interesting.......as pb4uski said, my impression was that distributions from 401Ks had mandatory 20% withholdings if they were eligible for rollover.
I know that 401K RMDs can have zero withholding but they are not eligible for rollover so that is entirely consistent pu4uski's link.

Not necessarily recommending it.......but for OP, if you did a direct transfer of 401K to IRA, IRA distributions don't have that mandatory withholding.....but you'd have to worry about getting IRA distributions out before 59.5 w/o penalty(72t) and loss of the 401K creditor protection.
There is mandatory 20% withholding on most 401k distributions, an example where that does not apply is RMDs.

If you roll the 401k into an IRA you can choose no withholding, unless you have a foreign address in which case a US citizen is subject to the 10% mandatory withholding.

Mandatory withholding from retirement savings seems perfectly sensible to me given that the Government has allowed tax deferral for so long.
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Old 10-28-2013, 01:40 PM   #9
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Thanks for all the info! I had searched around the internet, but never could come up with the documentation, so thanks pu4uski and others.
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Old 10-28-2013, 01:41 PM   #10
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And a big woo hoo for me - I just crossed from "recycles dryer sheets" to "Full time employment: Posting here." Guess I'm legit now.
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Old 10-28-2013, 01:55 PM   #11
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Originally Posted by MRG View Post
cj,

In my 401k SPD it allows penelty free withdrawls at 55, and terminated from service. In the SPD it says 20% withholding. Not sure there's any way around it.

MRG
Penalty free is not the same thing, that means you are not subject to the 10% tax penalty for withdrawing before age 59.5. If you look deeper into the SPD you may find that they will withhold 20% to pay the normal taxes due to withdrawing from a 401k.
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Old 10-28-2013, 02:05 PM   #12
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Penalty free is not the same thing, that means you are not subject to the 10% tax penalty for withdrawing before age 59.5. If you look deeper into the SPD you may find that they will withhold 20% to pay the normal taxes due to withdrawing from a 401k.
Sorry for my unclear post, we're saying the same thing. No 10% early withdraw penelty, but 20% withholding to the IRS.

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Old 12-08-2013, 01:54 PM   #13
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I am 55 now and hoping to retire before 59 1/2. I guess I should just check with my 401k provider, but I thought I heard that in order to take advantage of penalty-free 401k withdrawals one had to withdraw the entire 401k balance in one shot. Is this typically the case?
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Old 12-08-2013, 02:01 PM   #14
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Trooper - definitely not. I have already taken 3 separate withdrawals. Maybe it depends on your provider or your total balance, but I'd hate to think you would have to take the whole thing at once, especially if your balance was large. The taxes would be a killer!
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Old 12-08-2013, 02:18 PM   #15
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Agree I just took my first, 2%. Mine is all defined in the Summary Plan Description. Your benefits or HR department should provide the SPD.

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Old 12-08-2013, 06:30 PM   #16
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I am a federal employee with a Thrift Savings Plan (TSP) account. This is a 401k type of plan for govt. folks. I will have several withdrawal options post-retirement. If I choose to make a full withdrawal, then I have no choice but to pay at least 20% which is automatically deducted. My intention is to take periodic (monthly) withdrawals for an indefinite period, which will allow me to determine the amount of federal taxes withheld. Since I live in a state that also taxes 401k & IRA income, I will also have to pay 2% to Louisiana. My TSP will not deduct that amount, I have to take care of that myself.
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Old 12-08-2013, 07:23 PM   #17
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Quote:
Originally Posted by Trooper View Post
I am 55 now and hoping to retire before 59 1/2. I guess I should just check with my 401k provider, but I thought I heard that in order to take advantage of penalty-free 401k withdrawals one had to withdraw the entire 401k balance in one shot. Is this typically the case?
It depends on the provider. On mine, I have to withdraw the total balance. On DW's, partial withdrawal are allowed. I am hoping that by the time I have to withdraw, our 401K provider have changed to one that will allow partial withdrawal.
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Old 12-08-2013, 07:37 PM   #18
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You need to get a copy of the Summary Plan Description for your employer sponsored 401k . While it is allowable by law for you to take periodic withdrawals from your 401k if you terminate employment the year you turn 55 it's not required that the plan let you do that. The plan may only allow you to either take it all in one lump sum distribution or allow you to roll the entire amount to another company's 401k plan or an IRA.

The only way to know is to read the SPD and talk to the plan's administrators. My plan's SPD was so poorly written, it was impossible to determine if post 55 pre 59.5 withdrawals were allowed. The wording implied that it was not.
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Old 12-08-2013, 08:02 PM   #19
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Originally Posted by Brett_Cameron View Post
You need to get a copy of the Summary Plan Description for your employer sponsored 401k . While it is allowable by law for you to take periodic withdrawals from your 401k if you terminate employment the year you turn 55 it's not required that the plan let you do that. The plan may only allow you to either take it all in one lump sum distribution or allow you to roll the entire amount to another company's 401k plan or an IRA.

The only way to know is to read the SPD and talk to the plan's administrators. My plan's SPD was so poorly written, it was impossible to determine if post 55 pre 59.5 withdrawals were allowed. The wording implied that it was not.

Sounds a lot like my wife's crappy plan.....
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Old 12-08-2013, 10:40 PM   #20
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Let me raise a question is do they allow partial withdrawals after 59.5? If not then rolling it to an IRA makes sense, and then use the 72t rule for withdrawals if between 55 and 59.5.
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