Expert: Allen - 3/31/2007

Question
QUESTION: The corporation that I was working for recently split up and some of us were aquired by another company.  The 401k that I had with the previous company must be closed out.  My new company doesn't offer anything like that.  I was tols I have 60 days to reinvest my money.  Is this correct?  If I chose not to, how much of a penilty will there be since I actually did not request to withdraw this money?
Thanks
ANSWER: Do you already have a check? The answer depends on that. So let me know. And if you do, what is the amount?

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QUESTION: The check is in the mail they said.  Fidelity has to issue it to my old employer and then they issue it to me.  It should be aprox $18,000.00 or so.
ANSWER: You can avoid current taxation by setting up a rollover IRA account. The procedure is:

1.You should determine where you want to establish an IRA. You can set it up at a bank or stock broker or mutual fund company (such as Fidelity) or insurance company. You should tell the financial institution that you want to open an account for a rollover IRA and ask them for an account number.

2.If at all possible you should tell your former employer that the $18,000 is to be sent to the IRA rather than you. You will not owe any taxes and you do not have to worry about the 60 day requirement.

3.If your former employer will only issue the check to you, it's a little more complicated. They will withhold 20% as an estimate of the federal income tax. They may also withhold state income tax depending on where they are located and where you live. They will then send you a net check for 80% (or less) of the $18,000. You then have 60 days to deposit the check (for approximately $14,400) into your IRA. You can also deposit your own check for the amount that was withheld (approximately $3,600) into the IRA within 60 days. If you deposit a total of $18,000 you won't owe any tax and the amount that was withheld will be refunded by the IRS when you file your taxes in early 2008. If you only deposit $14,400 into the IRA, the remaining $3,600 will be taxable income to you. You will get a refund of the $3,600 that was withheld. But you will owe taxes on the $3,600.

If you do not have the money deposited to an IRA (either by your former employer or by you), the $18,000 will be taxable income. You will have to pay federal income tax, state income tax (if you live in a state with an income tax) and a 10% federal excise tax (unless you are 59 1/2 years old). The 20% that was withheld by your employer is only the amount the government requires the company to withhold. Your actual tax will probably be higher.

---------- FOLLOW-UP ----------

QUESTION: My prev employer didn't say anything about any holding of funds.  What if they don't hold out anuthing?

Answer
If the check is made out to you they are required by law to withhold 20% federal tax and maybe something for state tax. This is no different than the requirement to withhold tax on salary paid to you.

If the check is made out to a financial institution for a rollover IRA account, there is no withholding.