Should I take my money or leave my money?

One of my potential clients had a common dilemma most people have after leaving an employer. She left her 401(k) behind too. It was a small amount that she had accumulated while at working a part-time job about 9 years ago. She asked me a very good question a couple of weeks ago.

“If I take the money out and have the appropriate amount of taxes taken out, I will I owe taxes still at the end of the year?”

My answer to her question: “You will have to pay a 10% federal penalty and 5% penalty to the state of Wisconsin on top of the taxes, at the end of the year.

Most taxpayers would think that you wouldn’t owe any more taxes if you opt to pay upfront. If you withdraw funds from any retirement account before the age 59 ½, the IRS will charge a penalty of totaling to 10% of the total amount requested.  Some states charge a penalty as well, and Wisconsin is one of them.

My knowledge of this rule prompted me to ask the client “Is there a way you can roll it over into your current 401(k) account?” She told me she tried, but the old employer gave her the “run around” and that the decided that the amount was not worth the hassle of fighting them to do what she wanted.

One thing I learned the hard way is not to leave your financial assets with a company you are no longer doing business with, especially if you are no longer an employee.  What reason would they have to continue to care about your financial future anyway?

After reading her response, I also informed her that the amount she would take would also be taxed at her personal rate. I offered a free consultation to help her determine at what tax bracket she would fall in so she could request the correct tax rate for her withdrawal. She opted to look up her tax rate in the IRS tax tables. How financially savvy of her!

I’ve known the client for years. I pretty much know her what events take place in her life. So any of the “loopholes” I know would not have helped her. If you were never told before, for every tax rule there are exceptions.  Below are some events where the IRS would waive the 10% penalty.

1. You die and the money is given to your beneficiary.

2. You become totally and permanently disabled.

3. You request that the funds to be paid over time during your life, or your beneficiaries life, after you leave your employer.

4. You use the funds to cover medical expenses that exceed 7.5% of your gross income for the year.

5. The IRS levies (takes money from) your 401k account.

6. If you are a military reservist and have been called to active duty for at least 6 months after September 11, 2001.

7. If you are age 55 or older and leave your employer.

8. If you are age 50 or older, were a state or government public safety employee and you left your job.

9. If you are ordered to pay someone else for child support or alimony.

10. If you cash in dividends from an employee stock plan.

Do you have tax questions about your retirement account? Shoot me an email. I am here to help!

Jéneen R. Perkins is a freelance accountant and consultant serving entrepreneurs, families and small businesses. She prides herself in being fluent in English instead of “Accountant-ese”.