I established a new 401(k) account with my previous employer. I made a total of $600 in contributions ($100 x 6).

I don't want to keep this 401(k). First, 401(k) is not my preferred investment strategy. Second, the fund manager has me earning an absymal 0.01% (I have savings instruments better than that!). Third, if I could liquidate this money I could put it to a short investment that would give me a better return.

Does the IRS have any "small amount" rules that would work to my advantage? Or do I just go ahead and pay the penalty?

EDIT: Everyone's situation is unique. Answers are rarely simple. I invest in hard assets, while my spouse in investment accounts. I established this account to take advantage of the employer match, presuming I would be there for some time. Turns out, that wasn't the case. Since I don't invest in soft accounts, I want to liquidate this account.

I can't transfer to my spouse. I can't keep it where it is. I can roll it over to an IRA, then convert to a Roth IRA, but the fees would likely eat it up before the 5 year waiting period for no-penalty withdrawals kicks in. I don't have more than 7.5% AGI unreimbursed medical expenses, so I'm seeing no way to get around the 10% penalty.

  • You can borrow against it for 5 years at like a 4% interest rate. Depending on your objectives....... do the math
    – CQM
    May 22, 2015 at 0:03
  • Is there an employer match? And there are no other investments you can choose within this 401(k)?
    – Charles
    May 22, 2015 at 1:26
  • @Charles There was employer match and different mixes, but I did not work there long enough to qualify for either.
    – bishop
    May 22, 2015 at 3:08
  • 2
    @CQM - Note "previous employer" - can't borrow from it. For such a small amount, he may not even be allowed to leave it there. IRA transfer is the best bet. May 22, 2015 at 11:37

3 Answers 3


If you withdraw the money, regardless of how small the balance is, the IRS will still insist you pay a 10% penalty when you file your taxes (assuming you're under 59 1/2). Your 401K plan provider might have a policy that allows you to avoid the usual automatic withholding. You should check with them. $600 in additional income isn't likely to move your tax bill much, unless you're really close to a boundary in the tax brackets.

Rather than withdrawing the money, you can transfer the 401K to your next 401K, or roll it over to an IRA (plenty of no-fee options around). Once in a traditional IRA, you can convert the money to a Roth IRA. You pay the taxes on the amount, but no 10% penalty. Converting to a Roth has eligibility rules. You should double check with your financial institution before doing it.

Edit: You can withdraw without the 10% penalty if you leave your job after age 55 (credit to @JoeTaxpayer for the correction). This IRS Page lists the conditions under which the penalty can be avoided.

Edit: The original question has been edited to add more background details. Due to OP's investment preferences, I would also recommend that he simply withdraw the funds, pay the taxes and the $60 penalty and put the $500 or so dollars somewhere else.

  • 55. If he was 55 when he left company, no penalty. May 22, 2015 at 11:41
  • @JoeTaxpayer You are correct. I have edited the answer to reflect this, and added a link to the IRS page with other conditions for avoiding the penalty.
    – Kent A.
    May 22, 2015 at 12:31
  • 1
    I don't see what the tax bracket boundary has to do with the likelihood of $600 making much of a difference.
    – Joe
    May 22, 2015 at 21:22
  • @Joe It matters if his AGI is at the top of the "if your AGI is between X and Y, then your tax rate is Z". Like I said, $600 isn't much, but it it's within Y-600, it could affect how much tax he pays.
    – Kent A.
    May 22, 2015 at 21:51
  • How much tax he pays on the $600, or whatever portion pushes his AGI over to the next rate - but that seems trivial, given we're talking about a few percent extra on a few hundred dollars, no? That's not going to "move his tax bill much" regardless of where it falls. It doesn't shift your entire tax bill up to the next rate, after all, only the marginal rate on the last few hundred dollars.
    – Joe
    May 22, 2015 at 21:53

You can transfer 401(k) funds from a previous employer to an IRA, and invest it as you wish.

That $600 should go to the current 401(k) or IRA.

Edit - OP has edited his question. I agree with him that each situation is unique, therefore 100% of the details are needed up front to avoid the answers that would be right for everyone else. He offered a valid reason for rejecting the current advice. There is no solution except to simply withdraw the money. It went in pretax, so taxing on way out is not a penalty. The 10% is the real penalty, and it's $60 in this case.

  • Yep, I was just hoping for a short cut for such a paltry amount!
    – bishop
    May 22, 2015 at 3:10
  • 2
    You're 37. You should really have some savings. From What size “nest egg” should my husband and I have, and by what age? you should have 2X or more of your annual income saved for retirement. That $600 should go to the current 401(k) or IRA. It's a simple form to fill out. May 22, 2015 at 11:19
  • The current 401(k) or IRA should be stressed. Rolling over that $600 into a brand-new IRA (and putting in no other money into it) will cause that amount to be eaten away by fees even at low-cost custodians such as Vanguard which charges a $25 annual maintenance fee for small accounts (though it can be avoided by signing up for online access etc). An IRA invested in a savings account, picayune though the interest rate is, or CD from a local bank (is there a $1K minimum?) might be a better choice for "preserving" more of that money towards retirement. May 22, 2015 at 12:42
  • @DilipSarwate - i added the line to my answer and emboldened current. May 22, 2015 at 12:44
  • 1
    Thanks for helping me see I wasn't being properly specific, and then providing a concise answer! I always appreciate your wisdom and advice on money.SO!
    – bishop
    May 23, 2015 at 1:53

For such a small amount, I really don't think it's worth the time and effort to withdraw it. Why not roll it over into a traditional IRA or a new 401k / 403b?


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