Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
Need help understanding what needs to be done with a 401K (from a previous employer) being rolled over to a Roth IRA at share builder (personal).

I changed jobs in September and had a 401K plan, through the previous employer, with John Hancock. They matched 3% of my gross paycheck and added it to the plan, the 3% being pretax. Hancock delayed the rollover since they needed to know how I wanted the 3% taken care of, taxes removed or left as it was. I asked them to remove the taxes from the 3%, what I contributed was post-tax.

The previous employer did not have it set up so that the 401K money would be transferred to my Roth directly, and the previous employer received the check; to which I had to pick up and ship it out to share builder. I received this November 29th and had it shipped December 26th, over-nighted.

I just need to know if there is anything bad I should expect in this situation. Did I do this correctly or is there something I will have to do to fix this?
Print the post Back To Top
No. of Recommendations: 2
You have 60 days from the date of distribution of the Traditional 401k portion of your 401k to move it into a Traditional IRA to avoid taxes and early distribution penalties. If you want this money to be converted to a Roth IRA, you can avoid the early distribution penalties but you will still have to pay income tax on the amount.

Since Hancock withheld money from your distribution, you've lost the full earnings power of the money in a new account. However, if you make a desposit to a Traditional IRA for the original 3% value within 60 days of the distribution, then you can deduct that amount from your income and may be eligible for a refund from the funds withheld when you file your current year taxes. But you'll have to wait.

The proper thing would have been to open both a Roth IRA and a Traditional IRA with Sharebuilder, then had Hancock transfer both the pre-tax and post-tax 401k amounts to your respectie IRAs. Bad form for your previuos emplployer if they insisted on acting as a go-between. These days, electronic transfers are the norm and paper checks the abnorm.

Fuskie
Who thinks it is probably too late to do anything during the current calendar year but you may only have a few weeks into the new year to fix this if you choose to, so you should act quickly...

-----
Ticker Guide for The Walt Disney Company (DIS), Orbital ATK (OA), Titan International (TWI), Time Warner (TWX), Global Payments (GPN)
Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
Disclosure: May own shares of some, many or all of the companies mentioned in this post (tinyurl.com/FuskieDisclosure)
Fool Code of Conduct: http://tinyurl.com/FoolCode
Print the post Back To Top
No. of Recommendations: 5
I asked them to remove the taxes from the 3%

That was probably a mistake.

I received this November 29th and had it shipped December 26th, over-nighted.

How was the check made out? To "ShareBuilder, FBO cgrinder" or to "cgrinder"? Or something else? What was the date on the check/when was the money withdrawn from the 401(k)?

I just need to know if there is anything bad I should expect in this situation. Did I do this correctly or is there something I will have to do to fix this?

You will have a tax liability at your marginal rate for the match that you rolled over.

In addition, for the taxes that you had withheld, unless you are at least 59 1/2, you will have a tax liability at your marginal rate, PLUS a 10% penalty. You can fix the penalty by sending an additional check to ShareBuilder for the amount of the taxes that were withheld. You MUST do this within 60 days of the date that the money was withdrawn from the 401(k) account - so if the money was taken out of the 401(k) on or before Oct 28, 2017, you are pretty much out of luck. If it was on Oct 30 or 31, you need to get the check to ShareBuilder this week.

Another issue to be aware of is:
- The taxes were probably withheld at a 20% withholding rate - that's pretty typical for 401(k) withdrawals. However, your tax rate on this withdrawal will be at your marginal rate, and this income could even push part of the withdrawal into a higher bracket. If your marginal rate is 25% or higher, the taxes that were withheld will not cover the tax liability for this income, much less the penalty, if you can't get it corrected. Therefore, be prepared to pay additional taxes, or receive a smaller refund than you otherwise would have when you prepare and file your 2017 taxes.

For anyone under 59 1/2 who is converting pre-tax money to a Roth - either from a 401(k), like cgrinder, or from a traditional IRA: DO NOT have taxes withheld from the conversion amount, unless you can immediately add the withheld amount to the Roth account out of your pocket, or you will be assessed a penalty. As a general rule, if you cannot pay the taxes on a conversion from cash that's outside of the account that's being converted, you probably should convert less.

AJ
Print the post Back To Top
No. of Recommendations: 0
Need help understanding what needs to be done with a 401K (from a previous employer) being rolled over to a Roth IRA at share builder (personal).

I changed jobs in September and had a 401K plan, through the previous employer, with John Hancock. They matched 3% of my gross paycheck and added it to the plan, the 3% being pretax. Hancock delayed the rollover since they needed to know how I wanted the 3% taken care of, taxes removed or left as it was. I asked them to remove the taxes from the 3%, what I contributed was post-tax.

The previous employer did not have it set up so that the 401K money would be transferred to my Roth directly, and the previous employer received the check; to which I had to pick up and ship it out to share builder. I received this November 29th and had it shipped December 26th, over-nighted.

I just need to know if there is anything bad I should expect in this situation. Did I do this correctly or is there something I will have to do to fix this?

i had my kid post this to get an answer from the board....

he had a roth 401k from his previous employer...he wanted to roll it

to an already established roth ira at capital one...if that helps. cgrinder
Print the post Back To Top
No. of Recommendations: 0
i had my kid post this to get an answer from the board....

he had a roth 401k from his previous employer...he wanted to roll it

to an already established roth ira at capital one...if that helps. cgrinder


The answer is the still the same as I answered above whether it's you or your kid, although if it's your kid, it's even more likely that he will have to pay a penalty on the taxes he had withheld from the match, unless he is able to re-contribute that money within 60 days of when the distribution was made from the 401(k).

It was a mistake to have them withhold taxes from the match money, because of the penalty. He will probably have to pay additional taxes, plus the penalty, when he files his return.

Maybe some actual figures will help:

$10k in account - $4k from match and $6k from his Roth contributions.

He had them withhold taxes at 20% ($800) from the $4k, so the check included $3.2k from the match and $6k from his Roth contributions, so he rolled $9.2k into the Roth IRA.

He will owe taxes at his marginal rate on the $3.2k that he rolled over. If his marginal rate is 25%, that's $800

Then, he will owe taxes at his marginal rate, plus a 10% penalty on the $800. Again, if his marginal rate is 25%, that's $200 in taxes, plus an $80 penalty, for a total of $280 in taxes and penalty on the taxes that were withheld.

Adding both together, his tax liability is $1080 on the rollover. Since he only had $800 withheld, he will either have a $280 smaller refund, or he will need to come up with an additional $280 to pay the IRS when he files his taxes.

AJ
Print the post Back To Top
No. of Recommendations: 0
thanks for the explanation...he is just going to have to eat the taxes...live

and learn...he should make the 60 day transfer on the rest...the whole thing was

a huge lack of asking questions and communicating. he had slightly less than 10 grand

in the fund...hancock and his ex company (he took another job) just wanted to pay him off

get him off their books and not let him roll it to another roth account he already had

set up...i retired from another company june 2 and anything under 5 grand in there

retirement accounts they too just want a check written...i just wanted to see if there

was any way he could fix this....

thanks for the help and zak gets another lesson in life and pays for it.
Print the post Back To Top