Expert: Allen - 8/17/2004

Question
The company my fiancee works for was recently bought out at subsequently the company who handles her 401K has changed.  My fiancee specifically requested that her account be rolled over from the old company to the new company.  However, we just got a check in the mail from the old 401K company for cashing out her pension and subsequently taking out about 1/3rd of the money for taxes.  Can we make the old company take the money back and roll the correct amount of money to the new company as they were instructed to do?  If not, what are the issues involved in cashing the check and depositing it into the new account?  My fiancee seems to think that the money will be taxed a second time when it is withdrawn again, but I thought you could have a mixed 401K with pre-tax and post-tax contributions where the post-taxed money is not taxed a second time.

Thanks
Davy

Answer
She has two alternatives to avoid taxation on the distribution:
1. On her own, write a check for the gross amount to either the new plan (if they will accept it) or to an IRA account which she can set up at either a mutual fund company (such as Vanguard or Fidelity)or a brokerage firm (such as Schwab or Merrill Lynch). If its an IRA tell them it's a rollover from a 401k plan. She has to do this within 60 days of the day the check was received. When she prepares her tax return for 2004, she will get a refund for the taxes that were withheld. For example, if the gross amount was $10,000 and the net check was for $7,000, she must make out a check for $10,000 in order to receive a full refund of the taxes paid. If her check to the new plan or IRA is for $7,000, she will only receive a partial refund as the other $3,000 will be considered a taxable distribution.
2. Write or call the administrator for the old 401k and ask them what should be done to correct.
I would try #2 first but be prepared to do #1 if she doesn't receive a good response.  And remember that #1 must be done within 60 days of the day she received the check.