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401k Cashed Out Without Asking

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Anonymous
Not applicable

401k Cashed Out Without Asking

Hey all,
I got a check from the holder of my old 401k from a college job and I did not ask to liquidate it. I called a couple months ago and inquired about the process to transfer it but never mentioned closing it out.

Is this normal? Should I get them to reverse this so I don't inquire fees and penalties? Is there a way I can deposit the check into my checking and then IRA to mitigate some of these issues?

I'm just kind of amazed this happened. It's only a small amount. The job was a tipped/wage position and I only contributed a few percent for about 2.5 years so taxes and whatnot would not be extravagant and my plan was to move it to an IRA anyways so I'd have to pay taxes no matter what. Just curious if this is fine or if there will be unplanned consequences due to the unplanned method of transfer.

Thanks for any insights!
Message 1 of 15
14 REPLIES 14
tacpoly
Established Contributor

Re: 401k Cashed Out Without Asking

Most companies require a minimum balance for former employees’ 401k account, otherwise there is an automatic distribution (which is what happened to you). It’s because the company subsidizes management fees for all open accounts.

You can roll over the money to an IRA to avoid paying taxes and penalties. If you move it to a Roth IRA (which I would recommend), you just have to pay income tax on it.
Message 2 of 15
Anonymous
Not applicable

Re: 401k Cashed Out Without Asking

I would roll it over NOW the clock is ticking. More sure to use the gross not net if they took out any taxes

Message 3 of 15
Anonymous
Not applicable

Re: 401k Cashed Out Without Asking

Thanks! I appreciate the reply. The automatic dispersement crossed my mind. Are there any steps I need to take when transferring to my already opened Roth? Or can I just deposit it to my checking and then move the amount to the Roth?

Thanks again to both of you!
Message 4 of 15
tacpoly
Established Contributor

Re: 401k Cashed Out Without Asking

You should ask your brokerage firm how to roll over to your Roth. Most will be more than happy to help. I assume there are rollover forms, but I don’t know if it changes when the 401k funds have already been distributed.

Don’t deposit to your checking. You’ll want to sign over the check directly to your IRA/Roth to keep the paper trail clean.
Message 5 of 15
MakingProgress
Senior Contributor

Re: 401k Cashed Out Without Asking


@tacpoly wrote:


You can roll over the money to an IRA to avoid paying taxes and penalties. If you move it to a Roth IRA (which I would recommend), you just have to pay income tax on it.

I would be very careful recommending either a Roth,Traditional IRA, or anyother Investment/Retirement account as the best choice for anyone.

 

Everyones financial situation is different and a Roth might be right for you, and a Traditoinal  IRA right for me.   There might even be a possibility of rolling it into a current 401K which could be another good option depending upon the situation. 

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Message 6 of 15
Anonymous
Not applicable

Re: 401k Cashed Out Without Asking

I agree, that is a good point for anyone else that comes across this. In my situation I stated a Roth because that is my best option. My employer does not match on 401k and I am just starting to work out of college so all my retirement savings goes to Roth at the moment. I wasn't as financially literate when I started working in college but still knew starting to save early was good, which is why I opened the 401k when it became available to me.

Do your own research on your personal circumstances everyone! Thanks for pointing that out for others!
Message 7 of 15
tacpoly
Established Contributor

Re: 401k Cashed Out Without Asking


@MakingProgress wrote:

@tacpoly wrote:


You can roll over the money to an IRA to avoid paying taxes and penalties. If you move it to a Roth IRA (which I would recommend), you just have to pay income tax on it.

I would be very careful recommending either a Roth,Traditional IRA, or anyother Investment/Retirement account as the best choice for anyone.

 

Everyones financial situation is different and a Roth might be right for you, and a Traditoinal  IRA right for me.   There might even be a possibility of rolling it into a current 401K which could be another good option depending upon the situation. 


First of all, having a traditional IRA or a Roth or a 401k does not preclude having the others. You can have all 3 if you want.

 

Second, I do not see the harm of recommending having a retirement account. It’s like telling someone they should have a savings account. I frankly do not know how it could be a bad thing.  I did not tell the OP how they should invest the money.

 

Third, I actually read what the OP posted:  the 401k balance was low, OP wanted to put it in an IRA and was willing to pay tax on the money, and seemed to be at the beginning of their career/not a high earner.  So it was the direction the OP was going and I endorsed the idea as a good one specifically for the OP

 

Now if you you disagree with something specific that I’ve written, I’d love to hear it. But if you are are just slagging me for posting advice because someone else might get the wrong idea, then you should be lecturing most everyone here. Because I don’t always see disclaimers on posts. 

 

Message 8 of 15
Revelate
Moderator Emeritus

Re: 401k Cashed Out Without Asking


@Anonymous wrote:
I agree, that is a good point for anyone else that comes across this. In my situation I stated a Roth because that is my best option. My employer does not match on 401k and I am just starting to work out of college so all my retirement savings goes to Roth at the moment. I wasn't as financially literate when I started working in college but still knew starting to save early was good, which is why I opened the 401k when it became available to me.

Do your own research on your personal circumstances everyone! Thanks for pointing that out for others!

Any reason you aren't doing both?

 

Diversification between pre-tax and post-tax retirement plans isn't a bad idea and just because there's no match doesn't mean there's no value on a 401k, far from it actually.  I honestly view a match as just a bonus, defraying my top-line gross income is huge.

 

Had I been smarter about some things my own 401k balance would be non-trivially higher than it is today, and that's nothing but goodness.




        
Message 9 of 15
Anonymous
Not applicable

Re: 401k Cashed Out Without Asking

I'm always open to advice and opinions, I make 31k base pay with bonuses getting me to about 40k. I expect my earnings to be higher by the time I retire, so the Roth made the most sense under my current understanding and circumstances. Pay lower taxes now vs higher taxes later = instantaneous benefit vs deferred taxation.
Thoughts?
Message 10 of 15
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