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If I were to leave my job today; would the company keep 20% of my 401k for taxes?

I am 100% vested. I have been thinking about a change in employment but need to know if I were to use some of my 401k, for reasons I would rather not disclose, what are the penalties

Nov 05, 2014 by Darlene from Walton, KY in  |  Flag
5 Answers  |  7 Followers
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5 votes
Rich Winer Level 20

Darlene, If you are 100% vested, all of the money in your retirement plan should be yours. If you change jobs, you should be able to roll over 100% of the assets in your plan to an IRA or a new employer's plan. Taxes, penalties or withholding could apply if you were to take a distribution from your retirement plan prior to age 59 1/2. But they would not apply to your rolling the assets to an IRA or another employer's plan.

2 Comments   |  Flag   |  Nov 05, 2014 from Woodland Hills, CA
Rich Winer

Michael and Jonathan have done a good job of refining and clarifying my answer. You could also roll the money to an IRA and take a distribution to avoid the 20% withholding, but you would still be responsible for any taxes and penalties. If you are between 55 and 59 1/2, you would avoid the 10% penalty if you take the withdrawal from your 401K after you leave the company.

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Flag |  Nov 05, 2014 near Woodland Hills, CA
Darlene

Thanks so much to all of you! This really helps me!

Flag |  Nov 05, 2014 near Walton, KY

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3 votes

Darlene, any money you withdraw (not rollover to an IRA) from a qualified plan would be subject to ordinary income tax (earned income) for the year you take it, plus, if it is before the year you turn 59 1/2, there is a 10% penalty.

If, however, you leave employment in a company, you can avoid the penalty, but not the tax, if you are over age 55. You would have to be sure the money is still in your old 401(k). If you roll it to another 40(k) or IRA, then the 59 1/2 rule will apply for the 10% penalty.

Hope this helps.

1 Comment   |  Flag   |  Nov 05, 2014 from Delray Beach, FL
Darlene

Thanks so much to all of you! This really helps me!

Flag |  Nov 05, 2014 near Walton, KY

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3 votes

Darlene - yes, in short, if you take a withdrawal directly from an employer retirement plan such as a 401k or 403b - then the plan is required to withhold 20% for taxes. This is the case no matter what your age.

If you perform a direct rollover (NOT a manual, 60-day rollover) then this requirement is waived. However, all other WITHDRAWALS (not loans) do require that the plan withhold 20% for taxes.

As the other advisors mentioned, there is a 10% penalty if you are too young. HOWEVER - that penalty only applies if you are under AGE 55 for a 401k plan if you are no longer working at that company.

1 Comment   |  Flag   |  Nov 05, 2014 from Jacksonville, FL
Darlene

Thanks so much to all of you! This really helps me!

Flag |  Nov 05, 2014 near Walton, KY

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2 votes

What all they said, but also you are also generally under no obligation to do ANYTHING with the money. You can leave it in the 401k indefinitely if you wish. However, if your balance is below certain thresholds, the plan can require you to either roll it over to another plan (or IRA) or take a taxable distribution. Be aware if you (and your spouse if married) have substantial income in the year you take the distribution, the 20% they withhold might not nearly be enough if you are under 59.5 because of the 10% penalty. I have seen higher income earners who took distributions have to turn over as much as 50% of the money they received in tax.

1 Comment   |  Flag   |  Nov 05, 2014 from Bridgewater, NJ
Darlene

Thanks so much to all of you! This really helps me!

Flag |  Nov 05, 2014 near Walton, KY

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2 votes

Darlene,

Just to clarify, most companies permit withdrawals from 401K plans only when you either retire or leave the company. But as James noted, you are not normally required to take the money when you leave. ..you can let it stay in the plan and continue to grow. But if you decide to take it out, you can rollover the money to a new employer's plan (provided that plan permits it) or an IRA you set up or simply have them send you a check. If you roll the money over, then there will be no withholding for taxes. But if you a check sent to you (called a "distribution") the company is required by law to withhold 20% for taxes. They don't keep it however...they send it into the IRS. Then when you file your tax return next year, the amount you withdrew you will include as part of your income and the amount they withheld is counted as a credit against the total amount of taxes you will owe.

2 Comments   |  Flag   |  Nov 05, 2014 from Fort Washington, PA
Tracy Lee Miller

Woodwell answered correctly, however, if you are under age 59-1/2, you will also be subject to an additional 10% IRS penalty if you take the money. There are a few exceptions to the "premature" rule, so you should check with your tax advisor to see if you may qualify for an exception.

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Flag |  Nov 05, 2014 near Houston, TX
Darlene

Thanks so much! I'm not eligible for a hardship but I sure feel like I need it right now.

Flag |  Nov 08, 2014 near Walton, KY

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