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Scheherazade in Blue Jeans
freelance alchemist
*sigh*, part the third 
11th-Feb-2013 02:48 pm
Fuck everything & become a pirate
This one is less of an immediate ARGH and more just Something I Should Do Something About.

I have a retirement fund from my job in Atlanta. It has just been sitting there since that job ended. I have been forced to accept that my body isn't going to let me have the kind of job that does retirement funds ever again, in all likelihood. I have been processing the hell out of that and it is not what I need help with.

What I need help with is figuring out how to get and use that money in a way that a) gets me as much of it as possible and b) penalizes me as little as possible.

When I talked to them on the phone today (you would not believe the hoops I have to jump through just to change my surname), they told me that if I cash out, I'll pay a 10% penalty and will get screwed on my taxes in 2013. (They did not exactly say "get screwed", but it's clearly what they meant.)

So my questions for those of you who know stuff about retirement funds:

* What is the best way to handle this with regard to taxes?
* Is there any way to access the money without losing 10% of it?

It's not a huge amount, but it would take a nice chunk out of the rest of our debt, and it seems ludicrous to let an amount that would help us a lot now and help us almost not at all in 30 years just sit there for 30 years.
11th-Feb-2013 08:00 pm (UTC)
You should be able to roll this over into an IRA without paying any penalty or taxes. I think the transfer needs to occur directly from that fund to the IRA, without you having possession of the money in the meantime.

(Disclaimer: I Am Not A Tax Lawyer)

ETA: I think the question I answered isn't the one you asked -- my apologies.

Edited at 2013-02-11 08:03 pm (UTC)
11th-Feb-2013 08:05 pm (UTC)
Do IRAs have better penalties for early withdrawal?
11th-Feb-2013 09:02 pm (UTC)
Not really; the penalties are IRS penalties rather than plan/institution penalties, so they apply to any pretax retirement account.
11th-Feb-2013 09:15 pm (UTC)
My IRA's a Roth, so it's post-tax. I suppose it would be less of a tax hit to roll a 401k into a non-Roth IRA...
11th-Feb-2013 09:25 pm (UTC)
Rolling a pretax 401k into a pretax IRA should be no hit at all, but you still wind up unable to use the money for anything (barring one of the IRS exceptions) without taking the withdrawal hit.
12th-Feb-2013 04:16 pm (UTC) - That's not strictly true
You are allowed to take loans against IRAs, under more restrictive circumstances than in the past but it's still possible.

I believe that one of the major qualifying events for such a loan is a child entering college, which might be relevant to 'song in the near future.

I do recommend rolling it into an IRA rather than cashing out. The hit you will take for cashing out is substantial - a penalty off the top and then owe taxes on the remainder.
12th-Feb-2013 08:59 pm (UTC) - Re: That's not strictly true
It looks like the rules have tightened up enough that you can't really borrow against an IRA (only a 401k plan -- and then you need to still be working there so you have a repayment plan), though you can fake a loan in the short term by rolling it over (since you have 60 days to put as much money into the new account as you took out of the old one).

Qualified withdrawals for college expenses (not loans) should avoid the 10% penalty, though bankrate.com notes that they will be counted as income against financial aid eligibility :-(.

11th-Feb-2013 08:22 pm (UTC)
FWIW, there are a few circumstances under which you can take money from a 401K or an IRA without paying the 10% penalty, one of which appears to be disability of the plan participant, if that might apply? Another is buying a house, though there are additional conditions around that.

You'd still have to declare it as taxable income in 2013, afaik, and they will probably hold some of the money back against that tax debt.

This web page looks like it has good info.


It would be important to make sure all your i's are dotted and t's crossed so that your 1099R tax form reflects the correct reason for the distribution.

Hope this helps.
11th-Feb-2013 08:25 pm (UTC)
Thank you - that page looks pretty comprehensive! Disability may apply, depending on how they define it; I'm not on SSDI (but I should apply again).
11th-Feb-2013 09:32 pm (UTC)
IRS Pub 590 says:
Disabled. If you become disabled before you reach age 59½, any distributions from your traditional IRA because of your disability are not subject to the 10% additional tax.

You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.
That's for IRAs, but the definition for 401(k) plans is probably the same; even if not, you could roll the money into an IRA first and then withdraw from there.

(I would *hope* that qualifying for SSDI would result in suitable proof for the IRS as well.)
14th-Feb-2013 04:25 pm (UTC)
I would suggest calling the local office of your US Representative, who I believe is Ed Markey. The people in the office are not tax lawyers, not by any stretch, but they should be able to look up the relevant part of the tax code. More importantly, if 401(k)s do not have the same protections as IRAs for people defined as disabled, you can write a note to Mr. Markey about fixing this little problem in the tax code. And you can ask local friends to co-sign the note.
11th-Feb-2013 08:52 pm (UTC)
This. I think the most practical thing you could do, except if you use it for buying a house, is to roll it over into one of the low fee mutual funds like Vanguard - choose one that's got a little chance of making you interest but isn't terribly risky, and -- this is the important part -- forget you have it so.

We did have to use our retirement when my DH was out of work - no choice - but it was terrible for our taxes.
11th-Feb-2013 08:53 pm (UTC)
have it so = have it at all
11th-Feb-2013 11:21 pm (UTC)
Any windfall you collect now will be a target for the college finance people, potentially turning grants (free) into loans (debt). Best move really is rolling it over to an IRA, they can't touch that. Fidelity makes the process pretty easy, that's who I use.
12th-Feb-2013 02:01 am (UTC)
Yup. Even if she can avoid the 10% penalty and the tax hit, it'll screw them for financial aid.
11th-Feb-2013 11:29 pm (UTC)
The short answer, speaking as a former 401k benefits administrator, is that if you take the money as a cash payment to yourself, then you will be penalized. The base withholding is 20%, plus an additional 10% penalty because you're not of retirement age. The only way to avoid that is to roll over the money to some other retirement fund (like an IRA or another company's 401k), in which case you're not getting the money yourself, you're just changing who the custodian is.

If the cash infusion would really help in the short term even after the taxes, then it might be a good idea to just cash it out now. But if you think you can put it into an IRA or 401K with a really good rate of return and you want to build it up for later... well, there you go.
11th-Feb-2013 11:38 pm (UTC)
You didn't say if it was a IRA, 401K, or Roth IRA.

It looks like you're talking about an IRA/ 401K. Roth IRA is a different animal, being post tax money.

I am NOT an accountant.

Either way, you might be able to use a loan agains the actual money to prevent the tax hit & the 10%.

There are upsides & downsides to a loan. You have to pay back the loan. It goes back in as pre tax money, but has to come from post tax money, which means you're paying taxes on the interest you pay twice (eventually).

However, you will eventually have to pay the taxes on the money in an IRA /401K that you take out. The thought is that you'll pay less at age 59 1/2 than you do now.

Getting rid of the 10% penalty, though, may be possible. I think some other folks linked about that. Disability is one, but COLLEGE TUITION is another. Another is buying a 1st house, btw.

Rumor has it that you're going to be paying for that soon. Taking money to pay for that just seems... more pleasant.

If it's a roth IRA: Then you tell us, and we research more.
12th-Feb-2013 12:51 am (UTC)
Roll it into a Roth IRA and wait 25 years. You will need things then, too.
12th-Feb-2013 02:41 am (UTC)
Looks like you already got good info here, but a few quick notes:

* You may want to think about (a) waiting for a year when your family's adjusted gross income is low (due to, for example, deducting the cost of your daughter's college, or because you are not getting a paycheck) and/or (b) taking it out in chunks -- like 25% a year for the next 4 years -- to minimize the impact on your income tax. This is especially true if you can use part-but-not-all of the money for one of the "exception" uses. Eg, if your medical expenses are $4000 a year and that's more than 7.5% of your income, the tax-efficient thing is to just keep drawing on the 401(k) money to pay those expenses.
* On a related note: if you're eligible for a Health Savings Account, then 401(k) money can be rolled into that. Funds in an HSA are tac-deferred like a retirement plan, and can be used without penalty for any medical expense, regardless of the fraction of income. I think you're only eligible for an HSA if you have high-deductible/catastrophic health insurance.

One thing to bear in mind is that if your income is highly variable, being able to withdraw the money in a low-income year may be better overall -- even if you have to pay the 10% penalty -- than withdrawing it in a high-income year. If your marginal rate was 25% when you saved the money in a good-income year, and your marginal tax rate is 10% when you withdraw it in a bad-income year, that's a net win even after the penalty. It's also why you want to time withdrawals to match your income if possible -- if taking half in 2013 and half in 2014 avoid having the withdrawals push your total income in either year up to the next tax bracket, that's a good thing.

Also -- even if you never get a job with a retirement savings plan again, you are always eligible to put income into an IRA. This doesn't help if you don't have any extra money that you can save, but as noted above, it may be a good hedge to use in good-income years against later bad-income years, if the penalty will be less than the difference it makes to your top marginal rate.

I hope that made sense. Good luck!
16th-Feb-2013 09:17 pm (UTC)
The insurance companies keep mutating various spawn of the basic HSA approach, too; I think we're in one of those now. IIRC, the deduction level isn't THAT high for ours, but it's some sort of mutt cross-breed. Sometimes the employer will kick in part of each year's savings allowance, too.
12th-Feb-2013 01:02 pm (UTC)
^ What they said.

Also bear in mind that if you roll over the monies into an IRA, it will continue to earn interest over the next 25-30 years that you won't have to pay taxes on until you take the money out.

I had some money in a 401(k) from a previous job that I stupidly cashed out (I should have put it into an IRA or waited until we bought our house). I just took the 30% hit and paid taxes on it and then used it to pay down a credit card...I actually screwed up my taxes and the IRS caught the error and fixed it for me. :/
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