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Author: ThatDanGuy Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75377  
Subject: 401k rollover options..?? Date: 9/18/1997 11:24 AM
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Hi all! I have an interesting quandary to put
before you.

I'm hoping to leave the working world next year and
pursue a Ph.D. (Foolish enough for you?) But, I have
a modest-yet-significant amount of $ in my 401(k)
plan. I'm fairly sure the universities to which I'm
applying will not have rollover options for the likes
of me, though I'm not sure.

Assuming there are no such beasts & I'm allowed the
chance to enjoy indentured servitude, what are my
options? Is there a way to avoid the 10% penalty for
early withdrawal?

Thx,
-- ThatDanGuy
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 343 of 75377
Subject: Re: 401k rollover options..?? Date: 9/18/1997 1:14 PM
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Greetings, ThatDanGuy, and welcome to Fooldom.

<<I'm hoping to leave the working world next year and pursue a Ph.D. (Foolish enough for you?) But, I have a modest-yet-significant amount of $ in my 401(k)
plan. I'm fairly sure the universities to which I'm applying will not have rollover options for the likes of me, though I'm not sure.

Assuming there are no such beasts & I'm allowed the chance to enjoy indentured servitude, what are my options? Is there a way to avoid the 10% penalty for
early withdrawal?>>

Assuming you're under the age of 59 1/2 (in some cases 55 depending on the working of the plan document) AND assuming you're really asking if you can keep the cash WITHOUT paying the 10% on top of ordinary taxes, the answer is "No, you may not avoid the 10% penalty."

Basically, you have the following options to escape the 10% penalty when you leave your job:

a. Leave the money in the 401k at your old employer.

b. Transfer the money to a qualified plan of a new employer (assuming the plan allows such transfers -- not all do).

c. Transfer the money to a "rollover" or a "regular/existing" IRA.

d. Transfer the money to a "rollover" or a "regular/existing" IRA and then immediately transfer it again to a Roth IRA.

You say option "b" probably is unavailable, so ignore that one. Option "a" may not appeal to you. That leaves "c" or "d." With "c", you continue the tax deferral until retirement, at which time you'll pay ordinary income tax on any withdrawals based on the rates in effect at that time. The "rollover" IRA preserves the eligibility to later transfer the 401k money and all earnings thereon to a new employer's qualified retirement plan. It consists of only the 401k money originally deposited plus the earnings it accumulated while in that IRA. The "regular/existing" IRA loses eligibility for later transfer to another employer's plan because in addition to the 401k monies it also includes in the same account other IRA deposits you may have made or will make to that account. If 401k money is merged with those monies, then it loses its qualified status for transfer to another employer's plan. It does, though, escape current taxation and the 10% penalty if held past age 59 1/2.

Option "d" is a way to get the money to the new Roth IRA, which becomes effective in 1998. Under the rules as I understand them so far, 401k money cannot be transferred directly to the Roth without incurring the 10% penalty. But if put in an IRA first, then the money can be withdrawn from the IRA, be taxed at ordinary rates, and then transferred to the Roth IRA free of the 10% penalty. Cumbersome, but doable. The advantage is that by paying the ordinary income taxes on that sum now and letting the rest compound untaxed over a significant number of years, it has the potential to grow quite large. When you start withdrawals, all of the money from a Roth IRA comes back to you free of tax, unlike that in a 401k, "rollover" IRA or "regular/existing" IRA. Might be worth a passing thought to you.

Regards........Pixy

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Author: dnk Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 347 of 75377
Subject: Re: 401k rollover options..?? Date: 9/18/1997 3:36 PM
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Isn't there option "e":

http://www.geocities.com/WallStreet/8257/wdraw59.html

They have a JavaScript to calculate how much you can
draw without 10% penalty and they include links to other
sites for more details.

Comments?

Danny




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Author: bobewald One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 348 of 75377
Subject: Re: 401k rollover options..?? Date: 9/18/1997 4:03 PM
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I'm not sure from your post if you need some of the money from the 401K to live on. If so, you can avoid the 10% penalty on your withdrawal if it is from a qualified selfdirected Ira and you do it under the Form 72T. The 72T route commits you to a 5 year withdrawal at a specified amount that you pay regular income tax and State tax if applicable. Be aware also that some states charge a penalty on 401k disbursements in addition to the Feds.

Hope this helps

Bob

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 350 of 75377
Subject: Re: 401k rollover options..?? Date: 9/18/1997 5:23 PM
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Yo, Danny.

<<Isn't there option 'e':

http://www.geocities.com/WallStreet/8257/wdraw59.html

They have a JavaScript to calculate how much you can
draw without 10% penalty and they include links to other
sites for more details.

Comments?>>

Without going to the site, I can say there is an option "e" , and it's rarely used. It's called a 72t withdrawal, so named for the section of the Infernal (sic) Revenue Code where it's found. Basically, that says you can withdraw monies from an IRA or qualified retirement plan like a 401k as "substantially equal periodic payments based on the [owner's/participant's] life or the the joint life expectancy of the [owner/participant] and designated beneficiary." There are three ways to compute the amount to be taken, two of which are extremely complicated and require professional services. Once the method is determined, the withdrawals start and must continue for at least five years or until age 59 1/2, whichever period is the longest. Fail to follow the rules and procedures correctly, and the whole thing to include prior years' withdrawals becomes immediately taxable and penalized. It's a can of worms most folks don't want to get into.

Regards.......Pixy


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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 351 of 75377
Subject: Re: 401k rollover options..?? Date: 9/18/1997 5:26 PM
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Yo, Bob.

<< Be aware also that some states charge a penalty on 401k disbursements in addition to the Feds.>>


Good point. All in all, I believe 72t withdrawals should be made only in rare circumstances. Too much can go wrong.

Regards......Pixy

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