Today TaxMama® hears from Sergey in the TaxQuips Forum, with this problem. “I started a new job with a 401k plan this year; but I had to quit after a few months. I accumulated some money in my 401k with this organization; and I want to take that money out now. Am I subject to 10% early withdrawal penalty for this distribution? Effectively, if the money is taken now, I do not ever use this 401 contribution to defer taxes in any way. So would I get penalized just for moving money in and out of a 401 account during the same tax year? Doesn’t seem to be fair if it turns out to be that.”
Taxes and fair? In the same sentence? You’ve got to be kidding!
You say that if the money is taken now, you “do not ever use this 401 contribution to defer taxes in any way.” That’s not true. You’ve already gotten the benefit in your paycheck, where you were not taxed on these contributions.
Regardless, your contributions went into a pension system, not an IRA. You put the money in, reduced your taxable payroll – and got a tax benefit.
To avoid the penalty, you have two choices:
1) Try to convince your old employer to amend the payroll – to issue you a new check, increase your wages, file new payroll tax returns. I don’t think that’s going to happen.
2) Open an IRA account. Instruct the administrator of the 401k to roll over the funds. Then, the funds are in your hands – and no penalties.
Besides, you wanted to put the money away towards retirement. So, what’s wrong with leaving it in an IRA?
And remember, you can find answers to all kinds of questions about retirement plans and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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