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Tax Planning/unique situation for early 401k distribution


Dear Owen, Thank you for taking to time to respond to my question.  I don't think you've gotten one like this! I am 54 years old and have been fired from my job for a frivolous reason.  I fully expect to be restored to my position and made whole.  This is only the circumstance, not the questions.  The questions are:  1)I need some of the money from my 401k to live on until arbitration is complete (about $15k) and would like to minimize the taxes/penalties on that early distribution.   2) Since apparently the 401k plan in which I am enrolled is not terribly good (Brightscope sp?), I would like to take the larger portion out while I am separated from my employer, since once I return to employment with them I will no longer be able to do so.  I was thinking I could roll it into an Index Fund IRA until I can figure out how best to invest it.    Other pertinent information is:  1) that I have a small loan (about $7500) outstanding; 2) the total value of my account is just under $200k.  Finally, 3) I plan on leaving the company next year, after a medical leave.  I will turn 55 next year and I've read that I am entitled to take a certain distribution without penalty at that time.  I know there are a lot of moving parts to this question.  I went to a Financial Advisor whose services were furnished by my bank, but before he could work with me I was required to sign a contract with his agency which precluded litigation in the event of a dispute, relying instead on arbitration (not binding), and he seemed to be a bit irritated when I inquired how he and his firm were compensated by me for his services.  That was a red flag for me not to work with him.  Help! I'm unsure what to do.  Thank you so much for your advice.

Tanya - I'm not really sure what your question is here.  Most of your question deals with financial advice, which is not my area of expertise.  But, I will try and give you some basic information which could help to clarify some details for you.  Let's take your questions one at a time.

1) Taking $15,000 from your 401k at your age would subject you to income tax plus early withdrawal penalties, with some exceptions.  Depending on your total gross income, your adjusted gross income and your taxable income, you may or may not pay any tax on that $15,000 or you may pay a reduced amount as a result.  

2) This question is overly broad.  You have already sought out a financial advisor and you seem to be uncomfortable with him.  Might I make a suggestion?  I am not compensated by them, but I have been very happy to refer clients, family and friends to Fidelity Investments.  I think you will get the kind of investment-related questions answered by them.  I think you will find them to be non-pressure representatives.

3) Regarding the ability to take distributions after age 55 with no penalty, that depends entirely upon the conditions of the 401k plan to which you are a participant.  Again, you could talk to Fidelity about your options and they could give you an unbiased opinion on the 401k plan you are enrolled in.

I hope this helps you or gives you direction and some additional confidence to move forward.  

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As an Enrolled Agent, I am fully capable of providing tax advice as it relates to personal and business income taxes. Enrolled Agents are the only Federally licensed tax practitioners and are admitted to practice before all administrative functions of the IRS. My specialty is working with small business owners who file Schedule "C" and helping them to structure their business in such a way as to maximize as many tax advantages as possible. I also enjoy working with individuals who have both routine as well as complex tax situations. I prefer to concentrate on individuals and small business tax planning.


I have a 25 year background in financial services including tax, bookkeeping, insurance, real estate and securities. I was previously the Chief Financial Officer of a local and national franchise organization. I am currently semi-retired, but used to own (in partnership with another EA) an individual and small business financial engineering firm where I work with nearly 2,500 individuals and small business owners in nearly every state and almost every continent, assisting them in all aspects of their tax and financial well-being. I have prepared or reviewed more than 8,000 tax returns in my career.

National Association of Tax Professionals


Enrolled Agent, Admitted to Practice Before the IRS, Accredited Tax Preparer, Fellow of National Tax Practice Institute, Certified QuickBooks ProAdvisor (1999-2011), Sleeter Group Certified QuickBooks Consultant, Life & Disability Insurance Agent License (California, Texas, Maine), Real Estate Agent License (California); Many years of continuing education in all these fields.

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