Author Topic: Avoid 401k Penalty  (Read 3671 times)

FarmerPete

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Avoid 401k Penalty
« on: December 29, 2014, 08:00:32 AM »
My wife got a check in the mail from one of her old employer sponsored 401ks.  Apparently it only had just over $100 in vested balance, and they liquidated it for her.  Kind if annoying, since it was held at Fidelity and she has a personal Fidelity IRA...  Anyways, so now I've got this check.  I was already planning on maxing out my wife's IRA this year.  If I put $5500 into her IRA, will that some how cancel out the $100 check?  Can I put $5600 into her IRA?  Is there some kind of paperwork I need to fill out, or can I just transfer $5600 into her IRA like I would normally do $5500?  I know that paying the 10% penalty and income tax on $100 isn't a big deal, but I'd rather avoid paying fees if reasonably possible.

Gin1984

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Re: Avoid 401k Penalty
« Reply #1 on: December 29, 2014, 08:09:21 AM »
How long ago did they liquidate it?

slugline

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Re: Avoid 401k Penalty
« Reply #2 on: December 29, 2014, 08:12:44 AM »
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Rollovers-of-Retirement-Plan-and-IRA-Distributions

If it's been less than 60 days, then I think you do have a chance of contributing the $100 via rollover in addition to the $5500 yearly contribution.

MustachianAccountant

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Re: Avoid 401k Penalty
« Reply #3 on: December 29, 2014, 08:22:41 AM »
Also, keep in mind you have to roll the entire withdrawal into a new IRA.

Sometimes, when they send you a check to close out a retirement account, they withhold some of the balance for taxes - so the balance of the old 401k could have been $111, but they only sent you $100, and withheld $11 for taxes.
You're responsible for re-depositing $111, not $100, within 60 days.

FarmerPete

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Re: Avoid 401k Penalty
« Reply #4 on: December 29, 2014, 08:47:56 AM »
Also, keep in mind you have to roll the entire withdrawal into a new IRA.

Sometimes, when they send you a check to close out a retirement account, they withhold some of the balance for taxes - so the balance of the old 401k could have been $111, but they only sent you $100, and withheld $11 for taxes.
You're responsible for re-depositing $111, not $100, within 60 days.

The check and statement didn't have any details on withholding.  The IRS guidelines indicate that 20% is normal.  I'm guessing that based on the small sum, they decided it wasn't worth it.  I'll certainly double check on that.  When you say, "New IRA" are you implying that I need to open a brand new IRA, or would my wife's current personal IRA with Fidelity be sufficient?

FarmerPete

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Re: Avoid 401k Penalty
« Reply #5 on: December 29, 2014, 08:56:44 AM »
Looking at my wife's account online, it looks like they didn't deduct any taxes.  The check was for the full $109.11.  So to get this straight, I should transfer $109.11 into my wife's personal IRA immediately.  This will eliminate any penalties/tax.  I can then still make up to $5500 until April 2015 into the same account.  Correct?  I don't need to fill out any extra paper work so that Fidelity realizes this extra $109.11 is a roll-over and not a regular contribution?

Distribution Type: Lump Sum
Creation Date: 12/22/2014
Tax Reporting State: MI
Tax Year: 2014
Tax Form: 1099R
IRS Code: 1
Gross Amount: $109.11
Total Taxable Amount: $109.11
Total Non-Taxable Amount: $0.00
Net Unrealized Appreciation: $0.00
Ordinary Income: $109.11
Amount Eligible for Rollover: $109.11
Amount Rolled Over: $0.00
Net Amount of Check: $109.11
Deduction Amount: $0.00

Gin1984

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Re: Avoid 401k Penalty
« Reply #6 on: December 29, 2014, 09:15:41 AM »
Looking at my wife's account online, it looks like they didn't deduct any taxes.  The check was for the full $109.11.  So to get this straight, I should transfer $109.11 into my wife's personal IRA immediately.  This will eliminate any penalties/tax.  I can then still make up to $5500 until April 2015 into the same account.  Correct?  I don't need to fill out any extra paper work so that Fidelity realizes this extra $109.11 is a roll-over and not a regular contribution?

Distribution Type: Lump Sum
Creation Date: 12/22/2014
Tax Reporting State: MI
Tax Year: 2014
Tax Form: 1099R
IRS Code: 1
Gross Amount: $109.11
Total Taxable Amount: $109.11
Total Non-Taxable Amount: $0.00
Net Unrealized Appreciation: $0.00
Ordinary Income: $109.11
Amount Eligible for Rollover: $109.11
Amount Rolled Over: $0.00
Net Amount of Check: $109.11
Deduction Amount: $0.00
You do have to let fidelity know that it is a rollover. 

MDM

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Re: Avoid 401k Penalty
« Reply #7 on: December 29, 2014, 10:13:38 AM »
Amount Eligible for Rollover: $109.11
Net Amount of Check: $109.11

The two lines above, combined with your wife actually putting $109.11 into her IRA as a rollover in a timely manner, should be all the documentation you need to avoid 2014 taxes.

Catbert

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Re: Avoid 401k Penalty
« Reply #8 on: December 29, 2014, 10:14:36 AM »
And you'll probably need to reflect the "withdrawal" and "rollover" on your tax return.  If you get a 1099 (1099-R??) on this amount you'll need to reflect on your tax return and then account for it as a rollover. 

IIRC there's a line on the tax return for "distributions" and then a line for "taxable distributions".  You show it as a "distribution" but not as a taxable one.  (I may have the terminology messed up because I'm too lazy to pull my tax return.  But I know for sure if you get a 1099, you need to account for it.)