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Retirement Planning/401k Roll Over and WIthdrawal


I currently have $26k in an employee-based 401k provider at which I'm no longer an employee of for the past two years. Understanding the tax penalties involved, I will have to pull $14k from the account. Massmutual is required to withhold 20% for taxes..does it matter if I withdraw now or wait until I roll funds into another account. My question is..should I roll over the $26 into a Vanguard ROTH Star fund or SEP? I currently own a S-Corp it better to open a SOLO 401k thru my company and make contributions then?

The Financial Quarterback
The Financial Quarterb  
Thanks for your question. I appreciate allowing me to be of service.

We have some issues going on here that its important you understand. First thing is that you will be making a Pre-59 1/2 withdraw which will not only cause you to pay federal income tax but also a 10% penalty. Every company is different when it comes to partial withdraws. Some will take out an automatic 20% others will not. When its a full withdraw is when most companies will take out the 20% for taxes. In your particular case you owe the tax if you make a withdraw. Whether you pay it now or pay it later we start splitting hairs and possibly can lead to trouble down the road in case you have to pay a penalty due to underpayment of taxes or quite possibly spending the money before you paid the taxes.

Secondly, if you convert everything to a Roth as stated you will owe taxes on the entire $26,000 and a 10% penalty of the $14,000 you withdrew because you did not allow for 5 year aging on Roth conversions.

Thirdly, there are some differences between a Traditional IRA, Simple IRA, SEP, Roth, and Solo 401k. They have different advantages and different funding options. I would suggest the first question to answer is, "How much are you planning to contribute yearly?" and then decide which plan fits the best or maybe a combination between a Roth and Traditional.

However, if you are considering making a withdraw of these dollars currently then I would suggest that you are probably not ready to begin contributions.

I would take some time to meet with a Certified Financial Planner to go over your specific individual circumstance and start formulating a plan of action that will accomplish your goals and needs.

Thanks Again.  

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Richard E. Reyes, CFP


I can provide answers to questions relating to retirement especially relating to; income distribution, tax efficiency, long-term care insurance, life insurance, estate planning, asset protection, variable and fixed annuities, alternative investments and prudent portfolio design.


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