It just doesn't fee right...

[austin3515]

Should I feel guilty about telling participants that they can get out of the 20% withholding requirenment by rolling to an IRA first and then closing their account.

I don't advertise the option, but, as an example, I'm currently dealign with a Totally and Permanently disabled participant who is in what you might call dire straights.

And that IS what the rules say.

[K2retire]

Are you really doing them a favor by setting them up to owe a large about next April?

[pmacduff]

FWIW - we don't necessarily "recommend" that, but in the situation Austin describes (of total and permanent disability) we've been asked if there was a better way (than taking all the cash out of the Plan) because they will not end up owing taxes as T & P disabled. Even though the participant will more than likely get a refund of any the upfront withholding, would like to avoid it if possible.

Rolling to an IRA account allows them also to take only what they may need. That way they will only have to report what they take out, which perhaps is not the entire amount.

[austin3515]

Are you really doing them a favor by setting them up to owe a large about next April?

I'm not a personal financial planner, and as such it is none of my business, but if for example the extra money would make the difference between losing your home today or maybe losing your home in 6 or 8 months, I would think a rational person might conclude that getting around the withholding would serve their interests quite well. Or perhaps it means you can get the medical treatment you need versus not getting the medical treatment you need. Long-term financial planning is a luxury only available to those with positive cash flow.

[Jim Chad]

Austin, FWIW I'm confident there is nothing immoral about it. The Participant still ends up paying the correct amount of tax.

[david rigby]

Caution. It may not be a wash.

There may be a fee charged by the IRA custodian. And there might also be a fee charged for payment from that account.

[MoJo]

Caution. It may not be a wash.

There may be a fee charged by the IRA custodian. And there might also be a fee charged for payment from that account.

FWIW: If that is the case, look for different IRA provider....

[masteff]

Similar goes for any of the three IRA-only exceptions to the 10% penalty listed in the Form 5329 instructions.

"07 IRA distributions made to unemployed individuals for health insurance premiums.

08 IRA distributions made for higher education expenses.

09 IRA distributions made for purchase of a first home, up to $10,000."

For my, it's the old thing about the difference between providing information and advice.

I have had the conversation in which I stated:

If you take the money from your 401(k), you have to pay the penalty.

If the money were in an IRA, it might not be subject to the penalty; you should read this IRS document (5329 instructions).

Money taken from both your 401(k) and from an IRA are subject to normal income tax.

You have $xxx which could be rolled over at this time to an IRA.

[austin3515]

09 IRA distributions made for purchase of a first home, up to $10,000

I just had this conversation with an employee in the office

[mbozek]

Are you really doing them a favor by setting them up to owe a large about next April?

Why are you assuming employee is being set up for large taxes? Married couple who claim standard deductions and have $90.2k in taxable income would have an effective rate of less than 11% which is about half of 20% withholding on distribution. Income less than 90k will have lower effective rate. Employee can make estimated tax payment if needed. If the employee itemizes large med bills, taxes owed will be less.

No reason not to inform employee of opportunity to make direct rollover to avoid 20% withholding but tell employee to check for estimated tax payments. Employee may be able to defer part of distribution until 2013 which will reduce tax for 2012.

As for custodial fees, VG charges $10 annual fee on IRA accounts below $10,000. 0 on larger accounts. Maybe cheaper accounts available.

TD employee can withdraw IRA w/out 10% penalty.