My wife and I have a bit of a problem. She had a 401k with her employer for a couple of years, then she was laid off. She got a new job and…long story short…due to some snafu, we got a check for the proceeds of her old 401k account. I’m pretty knowledgeable about the consequences of this (and I saw on the paystub the huge amount of tax taken out). But the question is this:
Someone told her that she can put this money into the 401k at her new job (once she’s eligible), plus the $900 in taxes that were taken out of the original proceeds (out of our own pocket), then we could file to get that $900 in taxes back. Is this possible? Or are we out $900?
Glad to help House. You are correct in your assumption and you are not out of luck. You will be doing an indirect rollover into her new account. You just need to fill out a form with her new employer’s company and send a check for the total before tax amount of her previous plan.
You then file taxes and will be entitled to the $900 back in taxes. Now for my PSA. It is never a good idea to leave money in a previous employer’s plan, for this and many other reasons. If you like the way you have your investments allocated you can set up an IRA with the same investments in most cases.
Something like that, but I’m a little fuzzy on the details. I’m trying to remember from 2 years ago when I changed jobs and took my 401(k) money out (needed it for other things at the time).
It has to be done a certain date (probably April 15th, but I don’t remember if there’s also a certain number of days after getting the cash, also).
If she’s not going to be eligible at the new job in time, you can also put the money into an IRA.
The time period is sixty days from the day you received the check from her previous job. That rule is not seriously enforced though and you usually have some leeway. Cstamets is right that you also have the option of an IRA to hold the funds. That would protect you from this happening again if she leaves her current job at some point.
Disclaimer: I used to practice accounting. Haven’t in 10 years though. These were the rules, and as far as I can find, still are.
One important thing is to complete the rollover within 60 days of receipt of the proceeds from the plan.
From http://www.bankrate.com/brm/itax/tips/20010326a.asp :
However, if you had opted to take the money yourself, 20 percent of your account would have been withheld. For example, if you had $10,000 in your 401(k), $2,000 was withheld when you took the distribution, meaning you actually got only $8,000.
The IRS gives you 60 days to redeposit your distribution into another retirement account and maintain tax-deferred status. But even if you do that, it will cost you up-front cash. To ensure that your entire account meets IRS regulations, you must come up with the withheld $2,000 from some other source to make your rollover contribution equal to the original $10,000 distribution. You’ll get that $2,000 back when you file your taxes, either in cash or applied to other taxes you owe. In the meantime, however, you’ve given Uncle Sam free use of your two grand.
Hope this helps. Good luck!
Thanks for the advice everyone. I appreciate it.