retiring after age 55.
Client is 58.5. Retiring in a couple weeks. Has a 401k, wants to take some money out before hitting 59.5. What is the process for withdrawing from the 401k and then rolling the balance? Is there anything special that needs done?
Permalink Submitted by Alan - IRA critic on Fri, 2013-07-19 23:47
Nothing special. Client should request a distribution and will receive 80% of that due to mandatory 20% withholding. After receipt of the distribution a direct rollover to an IRA should be executed. A 1099R for each transaction will be received in January.
Permalink Submitted by Richard Stumpf on Mon, 2013-07-22 20:59
I didn’t ask my question well. We want to withdraw a small amount, and then do a direct roll of the balance, so we don’t have to deal with the 20% withholding. Client doesn’t have the assets to replace the 20%, and is only wanting to keep out less than 10% of the 401k balance. So I want to take the small withdrawal directly first, and then afterwards do a direct roll of what is left.
Permalink Submitted by Alan - IRA critic on Mon, 2013-07-22 21:53
There is no way to avoid the 20% withholding for any distribution paid to the client. But the 20% only applies to the distribution, not to the direct rollover. If client wants 10%, then he would receive 8% and 2% would go to the IRS. Then the remaining 90% would go to the TIRA via direct rollover. If client needs to actuall receive the entire 10%, he must increase the distribution request to 12.5. He would then receive the 10% and 2.5% would be withheld and the direct rollover amount would then be for the remaining 87.5%. He does not have to replace the withheld amount, but will be taxed on it unless he does replace it with other funds. Again, there is no way to avoid mandatory 20% withholding on a distribution to the client from a qualified retirement plan that is an eligible rollover distribution.