One of my potential clients had a common dilemma most people have after leaving an employer. She left her 401(k) behind too. It was a small amount that she had accumulated while at working a part-time job about 9 years ago. She asked me a very good question a couple of weeks ago.
“If I take the money out and have the appropriate amount of taxes taken out, I will I owe taxes still at the end of the year?”
My answer to her question: “You will have to pay a 10% federal penalty and 5% penalty to the state of Wisconsin on top of the taxes, at the end of the year.
Most taxpayers would think that you wouldn’t owe any more taxes if you opt to pay upfront. If you withdraw funds from any retirement account before the age 59 ½, the IRS will charge a penalty of totaling to 10% of the total amount requested. Some states charge a penalty as well, and Wisconsin is one of them.
My knowledge of this rule prompted me to ask the client “Is there a way you can roll it over into your current 401(k) account?” She told me she tried, but the old employer gave her the “run around” and that the decided that the amount was not worth the hassle of fighting them to do what she wanted.
One thing I learned the hard way is not to leave your financial assets with a company you are no longer doing business with, especially if you are no longer an employee. What reason would they have to continue to care about your financial future anyway?
After reading her response, I also informed her that the amount she would take would also be taxed at her personal rate. I offered a free consultation to help her determine at what tax bracket she would fall in so she could request the correct tax rate for her withdrawal. She opted to look up her tax rate in the IRS tax tables. How financially savvy of her!
I’ve known the client for years. I pretty much know her what events take place in her life. So any of the “loopholes” I know would not have helped her. If you were never told before, for every tax rule there are exceptions. Below are some events where the IRS would waive the 10% penalty.
1. You die and the money is given to your beneficiary.
2. You become totally and permanently disabled.
3. You request that the funds to be paid over time during your life, or your beneficiaries life, after you leave your employer.
4. You use the funds to cover medical expenses that exceed 7.5% of your gross income for the year.
5. The IRS levies (takes money from) your 401k account.
6. If you are a military reservist and have been called to active duty for at least 6 months after September 11, 2001.
7. If you are age 55 or older and leave your employer.
8. If you are age 50 or older, were a state or government public safety employee and you left your job.
9. If you are ordered to pay someone else for child support or alimony.
10. If you cash in dividends from an employee stock plan.
Do you have tax questions about your retirement account? Shoot me an email. I am here to help!
Jéneen R. Perkins is a freelance accountant and consultant serving entrepreneurs, families and small businesses. She prides herself in being fluent in English instead of “Accountant-ese”.
On November 15th 2011, Bloomberg published an article stating that “80 is the new 65” in terms of retirement. In the survey, 76% of participants stated that having a certain amount saved before retirement is more important than retiring at a certain age. 74% expect to work in retirement, of which 25% expect to work until 80 because they don’t have the proper savings.
I also read that our financial literacy declines as we age. In a country that has the best colleges and universities in the world and were 51% of the wealth is held by people over 60, why is that we lose our financial smarts in our golden years? The study that exhibits these facts is outlined in an article I posted to my Facebook and Twitter called "Our financial smart erode quickly after 60”. Basically as we age, we lost 1%-2% of our knowledge about money after turning 60. The reasons are attributed to memory loss and changes in our IQ. This idea is not far-fetched, as people in this age group often suffer from Alzheimer’s disease.
There’s a vicious financial cycle that we are ignoring. We, as a nation, are determined to work until we physically can’t because we have not saved, but we can’t admit that we are not as financially savvy when we are old. We are not taught the value of a dollar and how to grow the dollar as children. Our beliefs about credit and other debt are based on fairy tales of a sales associate at a lending institution.
Here what you can do to keep your financial wits about yourself:
1). Become more financially literate by researching topics that are appealing to you. Take the financial literacy quiz I posted on Facebook and Twitter. It will grade your quiz immediately. I even took it. I passed with a 70%, which surpasses the average score for my age group by 17%.
2). Estimate how much you will need in retirement. Use a planning tool like the one on ShareBuilder.com.
3). Create a savings that you can afford.
4). Talk to an investment advisor, if you feel the need to do so.
5).Open your traditional IRA, Roth IRA, or join for employer’s 401k program right away.
"Putting My Money Where My Mouth Is" is a journal about real life experiences and concerns of Jéneen R. Perkins. The purpose of the blog is to exhibit the real life challenges and answer the tough questions posed by the concepts of business, entrepreneurship and money.