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Old 12-23-2009, 09:25 AM
 
23 posts, read 147,057 times
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What are the rules for rolling a ROTH 401K into a ROTH IRA?

Mainly, I am wondering how I can avoid this 20% IRS withholding penalty?

I'm 23 and have over $40K in my ROTH 401K...paying a $8K+ penalty does not appeal to me at all!

Last edited by AndyPettitteIsGreat; 12-23-2009 at 09:44 AM..
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Old 12-23-2009, 09:39 AM
 
Location: SoCal desert
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AFAIK, if the 401K goes 100% directly into the IRA you've opened, there is no 20% penalty.
You should not touch the money. The 401K admin sends the check to the IRA account.
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Old 12-23-2009, 09:44 AM
 
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So then when is there a 20% penalty? Only for traditional IRA rollovers? Or for cash distributions?

Also what is a "Trustee to Trustee Transfer" vs a Rollover? I heard that is a way to escape the 20% withholding tax.

Last edited by AndyPettitteIsGreat; 12-23-2009 at 09:53 AM..
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Old 12-23-2009, 10:04 AM
 
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Quote:
Originally Posted by AndyPettitteIsGreat View Post
So then when is there a 20% penalty? Only for traditional IRA rollovers? Or for cash distributions?

Also what is a "Trustee to Trustee Transfer" vs a Rollover? I heard that is a way to escape the 20% withholding tax.
First of all, it is not a "tax" or a "penalty." You get the money back when you file your taxes.

Trustee to trustee means you never touch the money. If you actually take possession of the money, then the administrator of the IRA must withhold 20%. You then have 60 days to roll it over into another account or the entire amount becomes a taxable distribution. In your situation, you would get $32,000, but have to rollover $40,000, so you would have to have another $8,000 somewhere. You would then get the $8,000 back when you file your taxes. If you allow the trustee to transfer it directly, this isn't an issue.
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Old 12-23-2009, 10:11 AM
 
Location: SoCal desert
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Quote:
Originally Posted by AndyPettitteIsGreat View Post
So then when is there a 20% penalty? Only for traditional IRA rollovers? Or for cash distributions?
Cash distributions - if you take the 40K, put it in your checking account and spend it, you'll pay the IRS a penalty and taxes

Quote:
Originally Posted by AndyPettitteIsGreat View Post
Also what is a "Trustee to Trustee Transfer" vs a Rollover? I heard that is a way to escape the 20% withholding tax.
Transfer and Rollover is basically the same thing. As long as you have the check sent from the 401K Admin to wherever your IRA is, you're safe. Usually where your IRA is, whether it's a bank or a brokerage, can handle all the paperwork

For example (not recommending anything here!) - Call the nearest Merrill Lynch Brokerage. Tell them you have a 401K with ABC (your employer) and you want to move it and open an IRA account with Merrill. Just say "Can you help me" and they'll jump at the chance They'll also make sure you don't break any rules so you don't get penalized.
If you move it to an IRA at a bank, the bank can do the same thing as a financial brokerage.
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Old 12-23-2009, 10:20 AM
 
Location: SoCal desert
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According to the IRS website ..."Distributions received before age 59 1/2 are subject to an early distribution penalty of 10% additional tax unless an exception applies. For more information about the treatment of retirement plan distributions, refer to Publication 575, Pension and Annuity Income."

I've never heard of anyone getting it back at tax time. Doesn't it all depend on your deductions and credits, Madman? A friend of mine got half of her husband's retirement in the divorce and blew it like an idiot - even though everyone warned her. The IRS hammered her at tax time.
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Old 12-23-2009, 10:55 AM
 
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Originally Posted by Gandalara View Post
According to the IRS website ..."Distributions received before age 59 1/2 are subject to an early distribution penalty of 10% additional tax unless an exception applies. For more information about the treatment of retirement plan distributions, refer to Publication 575, Pension and Annuity Income."

I've never heard of anyone getting it back at tax time. Doesn't it all depend on your deductions and credits, Madman? A friend of mine got half of her husband's retirement in the divorce and blew it like an idiot - even though everyone warned her. The IRS hammered her at tax time.
You're talking about something different than the OP. The 20% is only withholding. It is no different than the withholding that is taken out of your paycheck. Therefore, when you file your taxes, that 20% is just added to the taxes that have been withheld by your employer. If you have rolled over the IRA monies within the 60-day deadline, then there is no taxable distribution and no increase in income. Consequently, you would have over-withheld your taxes and will receive a refund upon filing.

The penalty to which you refer is 10% and it is for early distribution of tax-deferred accounts.
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Old 12-23-2009, 11:00 AM
 
Location: SoCal desert
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Originally Posted by MadManofBethesda View Post
If you have rolled over the IRA monies within the 60-day deadline, then there is no taxable distribution and no increase in income. Consequently, you would have over-withheld your taxes and will receive a refund upon filing.

:: Homer doh ::
I need more coffee.

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Old 12-23-2009, 11:29 AM
 
92,465 posts, read 90,000,926 times
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Quote:
Originally Posted by Gandalara View Post
According to the IRS website ..."Distributions received before age 59 1/2 are subject to an early distribution penalty of 10% additional tax unless an exception applies. For more information about the treatment of retirement plan distributions, refer to Publication 575, Pension and Annuity Income."

I've never heard of anyone getting it back at tax time. Doesn't it all depend on your deductions and credits, Madman? A friend of mine got half of her husband's retirement in the divorce and blew it like an idiot - even though everyone warned her. The IRS hammered her at tax time.
actually 401k money can be hit at 55 if you stop employment and arent working anymore but you have to leave the money in the employers plan and take withdrawls from their. as far as i know 401k rollovers dont qualify for the no penalty at 55-59-1/2 but im not 100% sure..
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Old 12-23-2009, 11:43 AM
 
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Quote:
Originally Posted by mathjak107 View Post
actually 401k money can be hit at 55 if you stop employment and arent working anymore but you have to leave the money in the employers plan and take withdrawls from their. as far as i know 401k rollovers dont qualify for the no penalty at 55-59-1/2 but im not 100% sure..
They don't.

There's also a way for someone who hasn't yet reached even the age of 55 to take distributions without penalty - and that is to take them from the 401(k) based on life expectancy under Rule 72(t). You can actually do that at any age, although obviously the younger you are, the more miniscule the payment.
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