401K withdrawals and federal taxes (any accountants out there?)

[cj]

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.

 

[Brett_Cameron]

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.

 

[pb4uski]

I think you're stuck with the withholdings. From IRS 401(k) Resource Guide - Plan Sponsors - General Distribution Rules

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.

 

[kaneohe]

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.

 

[MRG]

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

 

[tinlizzy]

.....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 (?).

 

[kaneohe]

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/SB124181801239401917

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-reasons-to-leave-your-401k-behind-2012-08-16?pagenumber=2

http://www.latimes.com/la-ira-story3,0,6977190.story#axzz2j1tWCBlz

http://www.nolo.com/legal-encyclope...ected-from-judgment-creditors-california.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.

 

[nun]

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.

 

[cj]

Thanks for all the info! I had searched around the internet, but never could come up with the documentation, so thanks pu4uski and others.

 

[cj]

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.

 

[Alan]

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.

 

[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.

Sorry for my unclear post, we're saying the same thing. No 10% early withdraw penelty, but 20% withholding to the IRS.

MRG

 

[Trooper]

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?

 

[cj]

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!

 

[MRG]

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.

MRG

 

[martyb]

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.

 

[KingB]

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.

 

[Brett_Cameron]

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.

 

[martyb]

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.....

 

[meierlde]

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.

 

[MRG]

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.

My plan does. I'm learning I may be in a minority of folks with flexible, well documented plans.
MRG

 

[Dwhit]

I am in the same boat, retiring in a couple of weeks at 56. I am going to be withdrawing from my 401k until I hit 59 and 1/2 and can draw from my IRA. My 401k is with Principal. They also withhold the 20% Federal income tax automatically. Plus they will withhold an extra 5% for my state income tax.

Principal has it set up so I can withdraw pretty much as often as I want using their website. They will mail me the check, or I can set up direct deposit. I am planning on monthly withdrawals at present. It all seems to be very convenient, but I do wish I could set the withholding rates lower. No luck on that, however.

 

[Brett_Cameron]

Sounds a lot like my wife's crappy plan.....

While my 401k SPD implied that pre-59.5 periodic withdrawals were not allowed, it was and is allowed and I am doing it. I had to talk to people and get some plan forms that were not made known to the casual observer. It was almost like they did not want people to take advantage of this feature.

The caveat was that I had to set up a duration over which the entire amount would be distributed. I can only change the distribution plan by taking a lump sum distribution of the remaining balance or rolling the balance over to an IRA.

What I chose was a 15 year distribution window. The periodic payments started with 1/180 of balance the first month. The next month was 1/179 of remaining balance. This series would continue until the 15 years was up and the funds were depleted at age 70.

I chose the duration to ensure I had adequate income to cover anticipated expenses until I reach 59.5. At that time I will roll the entire balance to an IRA and change the distribution plan because I do not plan to empty the fund.
YMMV!

Edited to add: I will be rolling to an IRA that has fees lower than the current T Rowe Price 0.58% fees for the funds I own in the 401k and to get a broader range of funds to choose from.

 

[martyb]

The person at my wife's job (medical group) told she & I in a meeting that I requested, that If she withdrew any money from her 401k before age 59 1/2, they would withhold the 10% IRS penalty. Even after I showed them the IRS reg. I don't know what else to do. We don't really want to roll it over to an IRA, because then we will also be faced with the pre-59 1/2 penalty. I just don't think they really know what they're doing. Apparently they're not used to employees checking out (retiring) before 59 1/2. Not sure what we can do.

 

[MRG]

The person at my wife's job (medical group) told she & I in a meeting that I requested, that If she withdrew any money from her 401k before age 59 1/2, they would withhold the 10% IRS penalty. Even after I showed them the IRS reg. I don't know what else to do. We don't really want to roll it over to an IRA, because then we will also be faced with the pre-59 1/2 penalty. I just don't think they really know what they're doing. Apparently they're not used to employees checking out (retiring) before 59 1/2. Not sure what we can do.

Demand the SPD, they must provide it. Mine was staight forward, past age 55 and terminated from sevice qualified as a hardship withdrawl with no penalty. Yours may or may not depending on the SPD. If your plan doesn't allow it, you can do a rollover IRA and do a 72t.

I guess the Megacorp I worked for was knowledgeable about all the options.
MRG