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Old 01-06-2015, 08:38 PM
 
71 posts, read 64,514 times
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I'm sure some of you experts here can spend 30 seconds answering this as opposed to me spending 30 minutes or more reading more threads that don't exactly answer it. I already spent half an hour and didn't find a the answers, so I hope you'll help me out here.

Okay so I'm 62 and 1/2, and want to cash out one of my 401k from an employer I haven't worked with for 7 years. It's got $15k in it and yes I need the $15k in a lump sum, not monthly.

My questions are:
1) If I apply for the 401k disbursement this month (Jan 2015) I will not pay taxes on it until 2016, correct? Any way to pay taxes on it over a longer period or it will have to be paid based on my 2015 income, in 2016?

2) The threads I read seem to disagree on whether or not they will automatically take out 20% when I take the cash disbursement (I plan to just have it put into a savings or checking account).

So is there any way I can not have them withhold 20%? I am thinking my taxes on it won't be that much if it's based on my 2015 income which should be approximately:
$28k - my wife's and my jobs income total
$14k - my social security income (I'll be working at my job for 6 months while collecting but I will make less than the $15,720 exemption)
$15k 401k disbursement
=$57k approx. total for 2015

3) Is there any way I can take the lump sum $15k and NOT pay as much taxes on it? Any tricks/tips/loopholes for that aside from taking monthly disbursements over the whole year?

Thanks for your help!

Last edited by pdsnickels; 01-06-2015 at 10:02 PM..
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Old 01-06-2015, 08:53 PM
 
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You have to roll it over into an individual IRA to avoid taxes. People normally do that when they leave an employer. They often call it a rollover IRA.
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Old 01-06-2015, 09:08 PM
 
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Quote:
Originally Posted by lchoro View Post
You have to roll it over into an individual IRA to avoid taxes. People normally do that when they leave an employer. They often call it a rollover IRA.
I haven't been able to find anything definitive, but I think no matter which route you take, that 20% withholding is going to hit you. There's no way around it when taking directly from the 401(k) though I can't find whether the same withholding applies to a lump sum from a Rollover IRA. If that's some secret loophole, it's a pretty well hidden strategy.
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Old 01-06-2015, 09:11 PM
 
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1.- It depends on how you apply for it :
--> Do you want to apply for it to spend the money? Or have it in a savings?
-----> When you apply to get the money they ask you if you want them to withhold for taxes or penalties. If you don't just say so. At the beginning of 2016 they will send you a form to file with your taxes showing that you cashed it out and then you will have to pay the 10% penalty + taxes as if it were income.

--> Do you want to roll it over to a new plan?
------> Also tell them that. They can send the 15k check directly to the new plan or send you a check for you to send to the new plan. Remember you have to send the check to the new plan and not cash it or deposit in your own account. Or come 2016 -> see above!

2.- No they will not automatically take the money out. When you request the funds, in your case it sound like it will be a hardship withdrawal or plain withdrawal, they ask you if you want them to withhold the funds for penalties and taxes, you can choose not to have them to it. Come 2016 you pay it yourself.

3.- No trick, no loophole. You take it out before 59 1/2 you pay 10% penalty + taxes on it as if it was income.
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Old 01-06-2015, 09:36 PM
 
18,857 posts, read 13,607,134 times
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Quote:
Originally Posted by Jeo123 View Post
I haven't been able to find anything definitive, but I think no matter which route you take, that 20% withholding is going to hit you. There's no way around it when taking directly from the 401(k) though I can't find whether the same withholding applies to a lump sum from a Rollover IRA. If that's some secret loophole, it's a pretty well hidden strategy.
If you roll it from 401k to Ira rollover ther should be no taxes

If you then take a normal distribution you can do so with no fed taxes withheld
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Old 01-06-2015, 09:54 PM
 
71 posts, read 64,514 times
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Quote:
Originally Posted by lchoro View Post
You have to roll it over into an individual IRA to avoid taxes. People normally do that when they leave an employer. They often call it a rollover IRA.
Did you miss the part where I said I need to take a total cash disbursement? Or are you saying I can roll it over to Roth and THEN take a cash disbursement to avoid taxes?
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Old 01-06-2015, 09:59 PM
 
71 posts, read 64,514 times
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Quote:
Originally Posted by cawiau View Post
1.- It depends on how you apply for it :
--> Do you want to apply for it to spend the money? Or have it in a savings?
-----> When you apply to get the money they ask you if you want them to withhold for taxes or penalties. If you don't just say so. At the beginning of 2016 they will send you a form to file with your taxes showing that you cashed it out and then you will have to pay the 10% penalty + taxes as if it were income.
10% penalty? I thought at age 62.5 I would not have to pay a penalty... ?

Quote:
Originally Posted by cawiau View Post

2.- No they will not automatically take the money out. When you request the funds, in your case it sound like it will be a hardship withdrawal or plain withdrawal, they ask you if you want them to withhold the funds for penalties and taxes, you can choose not to have them to it. Come 2016 you pay it yourself.
Thanks. That's what I wanted to know. I hope that is the case because I may not actually owe that much based on 1/3 or so of my income going to be Social Security.
Quote:
Originally Posted by cawiau View Post
3.- No trick, no loophole. You take it out before 59 1/2 you pay 10% penalty + taxes on it as if it was income.
I'm taking it out at age 62. But I assume you are right that there is no way to avoid the taxes as if it's income, regardless. Just no penalty as I understand it.
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Old 01-06-2015, 10:01 PM
 
71 posts, read 64,514 times
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Quote:
Originally Posted by Lowexpectations View Post
If you roll it from 401k to Ira rollover ther should be no taxes

If you then take a normal distribution you can do so with no fed taxes withheld
If this is true then this amounts to a loophole, no?
i.e.; I would avoid taxes by not taking a cash disbursement from the 401k but then roll it over into a Roth and THEN take a cash disbursement?
Really?

Or when you say "normal distribution" that means I have to leave it in the Roth for awhile?
I'm confused.
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Old 01-06-2015, 10:48 PM
 
63 posts, read 99,947 times
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Ok, if you are 62 it will be a plain withdrawal.

They will ask you if you want the taxes withheld, you say no.

Come 2016, they will will send you a form that you will use to file your taxes then and pay the taxes on the amount you withdraw.

Depends on where you fall "total taxable" income wise will determine how much you owe on that 15k
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Old 01-07-2015, 02:19 AM
 
71 posts, read 64,514 times
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Quote:
Originally Posted by cawiau View Post
Ok, if you are 62 it will be a plain withdrawal.

They will ask you if you want the taxes withheld, you say no.

Come 2016, they will will send you a form that you will use to file your taxes then and pay the taxes on the amount you withdraw.

Depends on where you fall "total taxable" income wise will determine how much you owe on that 15k
Thanks.
Does social security income count the same as any other income in terms of the tax bracket or % I would owe against it?
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