| Newbie here, yet another 401k w/d question. |
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csmith
First Time Poster
Cash: $ 0.25
Posts: 1
Joined: 22 Nov 2005
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| Newbie here, yet another 401k w/d question. |
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Hi everyone-
New to the forum here having just found it...and I'm glad I did. Tons of useful information here. Hopefully some can give some sage advice on my situation.
I have a 401k that I'm considering dipping into. Not for frivilous reasons though. I recently lost my job and in my line of work, finding another could take a while, so I need a bit of a cushion for living expenses. Yes, I know I should have had a nest egg, but this layoff comes on the heels of having just spent that nest egg on an engagement ring. Perfect timing on my employers part.
So here's the situation. I'm 31, if that matters at all. My 401k is just shy of $10K. The money in is completly from the company; no contribution on my part. I was given the majority through profit sharing (~$7k) which was put in a money market account. With my most recent employer, that money was converted (rolled over?) to a 401k. Once it was a 401k account, I moved that money around into different mutual funds offered and had it earn another $2000. So, with no personal contributions, I've moved it up to just shy of $10k. I've read all the rules. I know 20% comes off the top. Then another 10% for early w/d. But, doing rough math, that still gives me just shy of $7k.
I would like to point out the intent of withdrawing it however. I don't want to take all of the money just to spend. My plan would be to withdraw it, reinvest $3k of it in a traditional IRA, take another ~$2k and put it in a brokerage account (I keep up fairly well with the stock market and would like to give it a shot), then use the remainder (~$2k) to provide me with a cushion until I find a new job.
That's a rough plan. Which is why I'm here. Knowing that I will probably need to take a little of it for living expenses, but fully intend to also invest a large chunk of it, what would be prudent? Does this plan sound like a good move, or am I way off base? Are there variables I haven't considered? If anyone could offer advise on what to do with this money considering my situation, I'd be very appreciative. Sorry if this is really long...just want to make the right move. Thanks for any help.
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Tue Nov 22, 2005 5:10 pm |
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MattL
Senior Member
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Joined: 25 Jun 2005
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Withdrawing the portion you will be "re-investing" in an IRA is not necessary and will cause you to pay taxes when you don't have to.
Rollover the 401k to a self directed IRA, and then if you really need emergency money to live on only withdrawal the $2k (or the amount needed if you want to have $2k after taxes).
Debt Elimination
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Tue Nov 22, 2005 7:23 pm |
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efflandt
Senior Member
Cash: $ 80.45
Posts: 401
Joined: 25 Apr 2005
Location: Elgin, IL USA
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There is no withholding of direct trustee to trustee transfer of 401k to traditional or rollover IRA. But you have to set up the destination IRA before you tell your old employer what to do with it.
However, if they make a check out to you, it is subject to manditory 20% withholding. If you then deposit that into an IRA (within 60 days), you have to make up the missing 20% (refunded at tax time), or you will be charged tax and penalty on the missing 20%. In other words, your employer withholds $2000, sends you a check for $8000, if you keep $2000, you end up with $6000 remaining for an IRA (if rolled over within 60 days).
The tax and penalty for the $4000 would come out of the $2000 withheld. At tax time you would get $600 refund in 25% bracket (or $1000 in 15% bracket), but would also be liable for any state income tax on the $4000.
If you did direct trustee2trustee and took a $2000 distribution from that, the check would be for $1600 ($2500 distribution for $2000 check). You would owe any state tax and probably more fed. tax/penalty at tax time.
Note that you could convert a portion of the IRA to a Roth IRA (if eligible) and pay the tax on converted funds now (no 10% penalty). Future gains in the Roth would not be taxed.
Just avoid owning the IRS more than $1000 or they may hit you with underwithholding penalty.
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Wed Nov 23, 2005 9:34 am |
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