Penalty Free Withdrawal from 401K during a rollover
Is the penalty free withdrawal rule still in place during a rollover from an employer sponsored plan? FOR EXAMPLE: Assume im 50 years old, I have a a 401K with $500K in it and im rolling it over due to a job change…i decide to withdraw or have $50K paid directly to me from the 401K to pay off my house, as other $450K rolls to my IRA. I know i pay taxes on the $50K that I’m using to pay off the home, but is the 10% penalty waived or has that rule been eliminated?
Permalink Submitted by Alan - IRA critic on Wed, 2024-09-18 18:16
The 10% penalty still applies to the portion not rolled over.
If you wanted 50k from the 401k, you would have to request a distribution of 62,500 since 12,500 will be withheld for fed taxes. What’s left should be directly rolled over to your IRA. The penalty will be 10% of 62,500.
It might be easier to simply roll the entire balance over to an IRA, then take a distribution from the IRA as IRA distributions are not subject to mandatory 20% withholding. But you need to decide how to pay the taxes on the distribution, if not through withholding. With an IRA distribution, you can decline withholding or request a rate that is 10% or more. You are not stuck with the 20% requirement, but if you underpay your income taxes you will be hit with an IRS and/or state underwithholding penalty.
Maybe you should consider whether it is worth it to pay off the home loan.