10

Recently, I checked the website of the last 401(k) plan that I contributed. I found that the account was "forfeited", which I assume it means that it was closed due to not being an employee of the company anymore and because there was no contributions for more than a year.

I received a check with the money that was on the account (around $1,000). My question is: can I open an Roth IRA to put this money in order to avoid the 20% penalty, or it is too late to avoid the penalty?

Something to note is that I will be able to contribute to an 401(k) plan again in a few months, so my idea is to put the money on the Roth IRA, and rollover it later to the 401(k) plan. Of course, if I need to pay the penalty no matter what, I prefer to keep the money and pay some of my debts.

16

If the check was payable to you, you had 60 days to deposit to an IRA. But, it needs to go into the same type of IRA as the 401(k) was. i.e. if the 401(k) was traditional, it goes into a traditional IRA, If 401(k) Roth, it goes into a Roth.

The 20% is not the penalty. The penalty is 10% for early withdrawal. The 20% is the tax withholding. If the 401(k) had $1250, and they kept $250 for taxes, you'd want to deposit the full $1250 into the IRA. At tax time, you'll get the $250 credited to your taxes, and either owe less or get a higher refund.

  • 3
    Since the OP mentions tax withholding, likely the 401(k) was traditional. You can open an IRA at most banks or credit unions, or an online company such as fidelity. – ChuckCottrill Aug 17 '15 at 15:31
  • 2
    Agreed, but I just wanted to spell it all out, even while keeping the answer short and sweet. – JoeTaxpayer Aug 17 '15 at 16:03
  • 1
    The taxable part could have also been related to vested matching funds. – mhoran_psprep Aug 17 '15 at 16:13

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.