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If I want to withdraw money from my 401K from the account where I no longer work, must I rollover the 401K into an IRA?

Left the company 3 years ago & 60 years old. Being told by the company that has the 401K, I must rollover to an IRA to withdraw funds & they also must take out 20% in withholding. True?

Aug 27, 2013 by Peter from Berkeley Heights, NJ in  |  Flag
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2 votes

You don't have to roll it over, but it's in your best interest to, both in terms of convenience and control.

By moving the money into an IRA, you're opening yourself up to the entire universe of investments. You can choose any investment company you'd like to manage your account.

There is one caveat if you still hold company stock in your old 401(k) plan. Those shares qualify for special tax treatment, so you may not want to roll the stock if it has significantly appreciated. Instead, consider withdrawing the stock from the plan and rolling the balance of the account into an IRA or qualified plan.

In addition, make sure you do a direct transfer. The IRS requires a mandatory 20% withholding on distributions from a 401(k) in the form of a check (which is what your old employer is referring to).

Comment   |  Flag   |  Aug 27, 2013 from McLean, VA

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Peter,

Since you no longer work for the company, you have the option to withdraw your money, in which case the plan would have to withhold 20% for taxes, or you can do a direct transfer from the plan to an IRA with no tax withheld. You could then withdraw whatever funds you needed from the IRA. Since you are over 59 1/2 there is no penalty for withdrawing the money, but you will have to pay tax. Another option would be to only withdraw the money you need and leave the rest in the plan.

It sounds as though you didn't actually talk to the plan's administrator. I strongly urge you to talk not only to the administrator, but to a financial advisor who can help you understand your options and match them with what makes sense for you.

Tom

Comment   |  Flag   |  Aug 27, 2013 from Marlton, NJ

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Joe Soto Level 15

No, you don't have to move it into an IRA. There are many options available to you like annuities. The only thing you have to keep in mind is it has to be a another qualified plan. Here is a good article to read if you want a little more information:

http://www.nasdaq.com/article/common-401k-rollover-mistakes-cm29382

I think Joseph can't be more right with his input and I would also take Tom's advice about talking to a financial advisor. One thing I would do is find out why they want you to move it. Are they getting rid of their company 401(k), that's very important information.

Comment   |  Flag   |  Aug 28, 2013 from Burbank, CA

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Peter, if you have a balance greater than $5000, you should be able to keep it where it is and take distributions. If that is what you want to do, just contact the plan administrator. Don't bother trying to talk to HR; the plan administrator is the one who administers the plan.

However, so long as you are 60 years old, you should just transfer your assets to an IRA, and then take distributions whenever you wish. . The reasons for an IRA are many, starting with the likelihood that the 401k will charge you a fee for each distribution in the 401(k). In an IRA, you will have control over fees and investment choices.

As for the 20% withholding, you won’t have to take out the withholding, but taxes will be due at income tax time. You will not have to pay an interest free advance to the IRS, but it will be due, either partially or in full at tax time. Contact a local financial professional, preferably a CFP(R) for advice.

Comment   |  Flag   |  Sep 20, 2013 from Delray Beach, FL

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Peter,

Generally if the account balance is over $5000, then they cant force you to move the money. I agree with Joseph, it may be in your interest to move it anyway, as you have many more options and can possibly seek professional advice and management. Also, if you do want to roll it to your own IRA, you should make sure they DO NOT withhold 20%. While you're over 59 1/2 there would be no penalty for that withholding, you may have to pay taxes you could otherwise defer on the withheld amount a mount, and that generally doesn't make sense.

Comment   |  Flag   |  Aug 27, 2013 from Malvern, PA

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Peter,

I will only add a comment to the previous answers as they are all correct. 401ks are built to put money in and not to take money out. It is usually very expensive to make withdrawals. IRAs are much better for taking periodic or regular withdrawals. Yet another reason for a rollover or direct transfer.

Barry

Comment   |  Flag   |  Aug 27, 2013 from Kingsport, TN

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