Did I outsmart Hewitt on my 401k withdrawal?

[sengsational]

As the year winds-down, I'm nearly back to zero on my after-tax funds. That means another withdrawal from the tax advantaged accounts. I left the company at age 55, so no 10% penalty pulling from traditional 401k, but they insist on 20% withholding. But since I'm controlling MAGI for ACA PTC, I'll not be owing that much tax. I found it annoying to pay a big wad to the treasury and then having them give it back to me.

But I didn't see anything wrong with doing a (direct) conversion from traditional 401k to my existing external Roth account, then pulling that money out whenever I wanted, presumably without tax consequences. My external Roth has been open for well over five years.

Did I outsmart Hewitt and skip past their mandatory withholding?

 

[43210]

I know little, just googled.
It seems the 20% withholding is an IRS rule (not Hewitt).
What you did was one workaround, though you'll have paperwork.
You can rollover to Trad IRA (which won't have required withholding), but I'm guessing you are staying in 401k for age 55 rule.

 

[Onward]

Did I outsmart Hewitt and skip past their mandatory withholding?

Your converted funds have to stay in your Roth for five years before you can withdraw them without a penalty.

This is the second of the five-year rules that apply to Roth IRAs. It applies until you are age 59 1/2.

 

[Animorph]

Yeah, the second 5 year rule.

Maybe rollover to a regular IRA? Still time to recharacterize the original Roth rollover.

 

[Senator]

You did not outsmart Hewitt. They have your funds and are charging fees.

If you really want to outsmart them, move the entire account to a tIRA, tax free. Then, move whatever you want to the Roth, at your own schedule.

 

[pb4uski]

I think that he needs to keep that money in the 401k until he is 59 1/2 to maintain penalty free access.

 

[Gotadimple]

I think that he needs to keep that money in the 401k until he is 59 1/2 to maintain penalty free access.

That's true, unless he uses the 72(t) rule. Same thing applies if he were to convert the entire 401(k) to a Traditional IRA. Withdraw penalty free at age 59-1/2, or use the 72(t) rule for early access - if it makes sense to do so.

- Rita

 

[pb4uski]

Well of course, but there are limitations on how much you can take out with a 72t... it might not be enough to meet his needs.

 

[sengsational]

I know little, just googled.
It seems the 20% withholding is an IRS rule (not Hewitt).
What you did was one workaround, though you'll have paperwork.
You can rollover to Trad IRA (which won't have required withholding), but I'm guessing you are staying in 401k for age 55 rule.

Ah, ok, thanks for that info. I thought it was Hewitt's rule on the 20%. Yes, the 55 rule is one reason. More reasons below.

You did not outsmart Hewitt. They have your funds and are charging fees.

If you really want to outsmart them, move the entire account to a tIRA, tax free. Then, move whatever you want to the Roth, at your own schedule.

Their fees aren't bad at all. As mentioned, I have penalty-free access to these funds prior to age 59 1/2. Also, there's a guaranteed income fund that pays pretty good that I wouldn't have access to "on the outside". So I'm not chafing to get out of this deal with Hewitt.

Your converted funds have to stay in your Roth for five years before you can withdraw them without a penalty.

This is the second of the five-year rules that apply to Roth IRAs. It applies until you are age 59 1/2.

I thought there was some more rules besides the account being open for five years. Thanks for reminding me of that.

But since there is other money that has been in the Roth account for a very long time, when I do pull from the Roth, won't I be pulling this "aged" money, leaving the newly transferred money in the account?

 

[pb4uski]

Yes, I think you can do that.... just keep good records. Also, while I have yet to do a Roth withdrawal, I suspect that your Roth IRA custodian probably keeps records on such things for their reporting to the IRS... or perhaps they just report withdrawals and you need to keep records demonstrating that the penalty does not apply.

 

[SecondCor521]

But since there is other money that has been in the Roth account for a very long time, when I do pull from the Roth, won't I be pulling this "aged" money, leaving the newly transferred money in the account?

IRS rules state that IRA withdrawals are deemed to be contributions first, then conversions from oldest to newest, then earnings. You don't have a choice about this, but since it is generally the most advantageous ways of doing things, most people don't object.

To pb4uski's comments, the TP is expected to keep records. I believe what is necessary is all of the Form 5498s for the applicable IRA, plus any Form 8606s filed with the IRS. From those two sources apparently the IRS can figure out if you're complying with the tax law and avoiding (or paying) any applicable penalties.

 

[sengsational]

Yes, I think you can do that.... just keep good records.

My "IRA" paper files (tIRA, Roth, 401k) are the fattest of any in the cabinet! I've been paranoid about throwing anything away, so I have statements from 1982 or something, when I opened my first IRA, lol! And everything in between.

IRS rules state that IRA withdrawals are deemed to be contributions first, then conversions from oldest to newest, then earnings. You don't have a choice about this, but since it is generally the most advantageous ways of doing things, most people don't object.

Ok, so since I've taken nothing from this Roth yet (this would be my first time), the funds I remove would be considered some of my original contributions being removed...older than 5 years and penalty-free, even though I'm not 59 1/2 yet.

So I'm concluding that beyond this little shift in the ratios (contribution::conversion::earnings), my little play doesn't have much impact, and I've got funds without the 20% withholding!

As always, thanks all, for helping me through this

 

[43210]

Read this "Two 5-Year Rules For Roth IRA Contributions & Conversions"
https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/

What you are doing could be considered one isolated rung of a "Roth ladder".

Personally I think I won't mess with Roth distributions until (year of age) 59.5, though it's worth knowing the option is there. (I dread the recordkeeping with brokerage transfers etc.)

I was persuaded in another thread that the 20% withholding isn't that bad anyway. You get the excess back with your tax return each year, so you are temporarily out of pocket each year, and if you are keeping taxable account near zero, it's a one-off effect of needing to withdraw more for the overpayment of tax.

For tax-planning, it seems it is best to do Trad 401k withdrawals towards the end of the year, so you can better control income (e.g. going to top of a bracket, or staying below a cliff), and you minimize the time you are fronting the IRS the excess tax.

 

[SecondCor521]

Read this "Two 5-Year Rules For Roth IRA Contributions & Conversions"
https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/

What you are doing could be considered one isolated rung of a "Roth ladder".

Personally I think I won't mess with Roth distributions until (year of age) 59.5, though it's worth knowing the option is there. (I dread the recordkeeping with brokerage transfers etc.)

I was persuaded in another thread that the 20% withholding isn't that bad anyway. You get the excess back with your tax return each year, so you are temporarily out of pocket each year, and if you are keeping taxable account near zero, it's a one-off effect of needing to withdraw more for the overpayment of tax.

For tax-planning, it seems it is best to do Trad 401k withdrawals towards the end of the year, so you can better control income (e.g. going to top of a bracket, or staying below a cliff), and you minimize the time you are fronting the IRS the excess tax.

Emphasis added.

I believe it is actually "age of 59.5", not "year in which you turn age of 59.5." For me, having been born in late May, the two dates are nearly 11 months different.

 

[43210]

^ Oops. Yes it appears I got the age 59.5 rule wrong (maybe I was thinking of how it works for 55 and 70.5).