Company Canceled 401K Plan
My client’s company canceled their 401K and Roth 401K. He has a ROTH 401K and wants to roll it to a brokerage account. They are telling him he will have to pay penalties because it will be a withdrawal. Does anybody have experience with this? Common sense would say since it is canceled it should be able to be rolled somewhere else.
Thank you
Permalink Submitted by Anonymous (not verified) on Thu, 2010-09-16 01:20
I am not sure what “cancelled” means in the large context, but I agree with you that you should be able to roll the funds over and get the appropriate 1099-R coding. On the other hand, you may have to fight this out with them and it may not be worth the time and effort, SO,
If they issue you the funds directly and code them as premature, and withhold 20%, you can still can roll them over within 60 days – you will need to make up the 20% out of pocket and get the tax credit later on, so why not take that approach if everything fails?
pko
Permalink Submitted by Alan Spross on Thu, 2010-09-16 03:55
Generally with a full termination, the plan has a deadline of one year to distribute the plan balance to employees, including a requirement to offer a direct rollover. Also, the employees are typically awarded full vesting of their balances.
There is no tax or penalty for direct rollovers to a Roth IRA and no mandatory withholding. The Roth IRA holding period trumps the holding period for the Roth 401k for non qualified balances. And if you ask for a distribution paid to you, the plan must make an effort to limit the withholding only to the taxable balance. For a Roth 401k, that would usually be a small portion of the balance. Following is copied from Notice 2008-30 on Roth 401ks , Q&A 6:
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Q-6. What are the withholding requirements for an eligible rollover distribution
that is rolled over to a Roth IRA?
A-6. An eligible rollover distribution paid to an employee or the employee’s
spouse is subject to 20% mandatory withholding under § 3405(c). Pursuant to
§ 3405(c)(2), an eligible rollover distribution that a distributee elects, under
§ 401(a)(31)(A), to have paid directly to an eligible retirement plan (including a Roth
IRA) is not subject to mandatory withholding, even if the distribution is includible in
gross income. Also, a distribution that is directly rolled over to a Roth IRA by a
nonspouse beneficiary pursuant to § 402(c)(11) (see Q&A-7 of this notice) is not subject
to mandatory withholding. However, a distributee and a plan administrator or payor are
permitted to enter into a voluntary withholding agreement with respect to an eligible
rollover distribution that is directly rolled over from an eligible retirement plan to a Roth
IRA. See section 3402(p) and the regulations thereunder for rules relating to voluntary
withholding.
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Permalink Submitted by Jeff Stanga on Thu, 2010-09-16 17:52
Thank you very much.