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Lucy, Esq.
Lucy, Esq., Attorney
Category: Legal
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Experience:  Lawyer
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Good afternoon, I currently have a 401K plan with my employer

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Good afternoon,

I currently have a 401K plan with my employer that holds a balance of 44K. This balance was accumulated over a six year time frame based on a percentage of my yearly earnings as a company contribution and end of year. for example if I earned 100K in the year and the interest rate return on the plan ended at 5%, then the company contributed 5K ( 5% of 100K ) this plan had a 20% yearly vesting as golden handcuffs until year 6 when fully vested ( which I am ). I am going to quit soon and am contemplating cashing out the account since it is not my main saving vehicle. since i'm fully vested am I entitled to the full 44K ??. I understand the tax consequences but from the companies stand point, is the full 44K mine since I am fully vested ??.

My name is XXXXX XXXXX I'd be happy to answer your questions today.

If you do a direct transfer to another retirement account, you will get the full balance in the account as of the day you leave, because you are fully vested. If you take the cash as a lump sum distribution, your employer will send 20% to the IRS. If you're planning to roll the funds over, that can actually hurt you, because you have to come up with that 20% that was given to the IRS to avoid having those amounts taxed as income.

At the end of the year, if it turns out that you have overpaid and did not owe the IRS that 20%, it would be returned with your taxes, just like with any other tax refund.

If you have any questions or concerns about what I've written, please reply so that I may address them. It's important to me that you are 100% satisfied with the service I provide. Otherwise, please rate my service positively so that I get credit for answering your question. Thank you.
Customer: replied 3 years ago.

OK , so just to clarify, If I go to my employer and tell them I want to close the 401K and cash out, They would send 20% to the IRS ( for est. taxes on full amount of 44K = 8,800) and then cut a check to me for 35,200. subsequently at the end of year I claim the 35,200 as income and pay any additional taxes over the 20% if required. otherwise the 35,200 is mine correct??.

Not exactly. They report the full $45,000 to the IRS as income, but they also report that you paid the $8,800 in taxes. If you're not yet 59 1/2, the IRS will charge you a 10% penalty on the full balance that was given to you. That's in addition to the income taxes.

There are some exceptions to the penalty, such as if you become disabled, use the money to pay certain medical expenses, or need to make a withdrawal as part of a court order related to a divorce.
Customer: replied 3 years ago.

OK, so to clarify again, I would still receive the 35,200 and then have to pay a 10% penalty. would the 10% need to be paid then or at tax time ?

The penalty is due by the final filing deadline and can be paid with your tax return (or can be deducted from any refund).
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Customer: replied 3 years ago.

excellent, it seems you have answered all of my questions and I feel more clarity about the issue. Not sure I want to pay that much but I am now clear on my options.


Thank you very much

I'm glad I could I help. Whatever you decide to do, good luck.

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