Question for Those Who Understand 401(k's) & Retirment Plans

[romantico]

I worked a job years ago where I had a 401 (K) . Well, I quit there and began working for a friend. There were months and even at a time up to a year where I was not working. Over the years I have received a statement from Wells Fargo but since I knew had to do with my 401 K, I just sort of ignored it.

So,a couple weeks ago my Mom was going through some of my mail and came across my most recent letter from Wells Fargo. She asked if she could open it and I said yes. It's an account summary and shows an ending balance. It's titled my Retirement Savings statement and it's about 10 pages long.

I have a few questions. First off, I want to know if I can close out the account. I am currently unemployed and assumed once I started working again I would start paying into this again. However,I am in a desperate financial situation and could use the money. I know I'll be taxed for it (least I think I will) What I am having a problem with is, I have to call them up and get some answers. I just don't know what to ask. I am totally clueless with this sort of thing and I am embarrassed by that. I've poured a lot of money into this over the years and I have debated on whether or not I want to close this account. If ANYONE understands or has been through a similar situation,I welcome any advice. Many thanks in advance

[Heddi]

1. Don't be embarassed. Call them

Tell them just what you wrote in this post...how you came about the 401k, why it's been dormant for a while, and you want to know what your options are for cashing it out, rolling it over to an IRA, etc.

I've cashed out 1 401k years ago, and I believe you're taxed 20% then get hit with an early-cash in fee/tax as well. So you'll see a sizeable chunk of that money just gone.

Depending on your age, it may be feasable to get it rolled over into an IRA, because depending on the type of IRA you have and your age, you can take $$ out of the IRA with minimal fees/taxes or none at all (again, depending on your age).

This is what the people at BOA get paid for. To answer your questions. And I have to tell you that i've had a lot of jobs, and a lot of IRA's and when I call to ask questions about them I don't get a runaround flim-flam from the people on the phone.

Ask your questions. Tell them your concerns. See what they have to say

[denverbill]

2. You can close it, but you will pay a penalty in addition to taxes.

I think it's a 10% penalty on the total amount right off the top.

Wells Fargo should and I'm sure will tell you exactly what the penalties/taxes would be. Just tell them you want to make a withdrawal
from or close your 401K and they will walk you through the process.

You can close it and get to most of the money. I would advise against it if there was any way to avoid it, but if you are in truly dire straits, it is an option.

[kelly1mm]

3. here are some basics:

1) If you are under 59.5 years old, you will pay a 10% early withdraw penalty. If over 59.5 no 10% penalty.

2) you will pay income tax on the amount you withdraw (but remember, if your income is less than the taxable amount for the year - about 10k for singles, about 20k married, add about 4k per kid you will have no income tax on the amount of income under that amount)

So, if you have no other income for the year and you are single with no kids and under 59.5, and you take 10k out, your total tax bill will be $1000 (penalty only). If over 59.5, no tax due.

One thing, many (most) 401k companies WILL withhold 20% for taxes, minimum, so you would have to wait till you do your taxes to get the 'excess' taxes back.

[romantico]

4. Thanks!

Thanks for the advice. It's a big help. I have a friend who thinks they can help me with a job but I am having major car problems and was going to use the $$$ as a down payment to lease a new car. Since there is less than $10,000 in the account I doubt I'd get much in the long run. I've never had to pay taxes before.I've always got a return back,even if it is a very small,I've never had to owe. Between healthcare and needing a new car and job, any money would be helpful. However,it sounds like the price I have to pay for this is awfully high.

[trof]

5. You can also borrow money from a 401-K.

The interest rate is low, AND... you're paying it back to yourself!
I did this when i was still working and it worked well for me.

The 401-K plan administrators will set up a monthly repayment plan for you.
There's no penalty or tax, since it's a loan, IIRC.
You might check it out.

[Ruby the Liberal]

7. Unfortunately, loans are not available once employment is severed.

A good option - if your circumstances thread the needle of the restrictions.

Borrowing directly against your 401k is not an option if you are no longer employed by the company your 401k is with (not the bank, the employer). If you have an outstanding loan, you have to repay in full within 60 days of terminating employment and if you are unable to make the account whole, it is regarded a distribution and you will pay the tax and any applicable penalties.

In addition, unless the loan was purposed for purchasing a home while still employed, the term is limited to 5 years.

What can be done is to transfer the money to an independent bank or other financial institution and then take out an interest-bearing collateral loan against the outstanding balance (interest bearing, but will not diminish the account balance from earning its rate as it will be frozen for the loan balance duration).

[Ruby the Liberal]

6. kelly1mm laid it out, but you also should know

that a recent law change means that 401k statements must list the fees you are being charged for managing assets and account "administration".

Most companies pick up management fees for current employees, but once severed from service - you could be paying as much as 2-3% for "administration" on top of asset management/mutual fund fees.

Don't hesitate to call Wells to ask about this. Thats their job - to answer your questions.

You can always transfer a qualified account (tax advantaged) to a regular bank, credit union or investment company. A trustee transfer (financial institution to financial institution in your name) has no tax consequence (but can have hefty fees on both incoming and outgoing). Getting the old qualified account to cut you a check is cheaper, but you must reinvest in another qualified plan within 60 days to avoid the tax implications & penalties kelly1mm laid out and the onus is on you to prove that you made a transfer from one qualified plan to another. KEEP RECORDS if you choose the latter for even $1.

Best of luck to you with the new opportunity - and if taking the current tax hit + 10% penalty is worth it for you - only take what you absolutely need. Your 401k isn't an ATM!