Hi I'm new here and I have a question. My wife was laid off in October of this year from her job of 14yrs and yesterday she made arrangements to withdrawl in one lump sum her entire 401k. The amount was only $10,450. I know I will have to pay back 20% tax to federal and a 10% penalty tax. I'm sure there is a state tax also but not sure of the percentage; we live in South Carolina. I know I should do the right thing and roll this into an IRA but with her being unemployed I would also like to pay off all my credit card debt. Would I be pentalized at all if I rolled it into an IRA when I receive the check in the mail? Any help would be greatly appreciated.

Thanks,
Mike

There is no penalty if it's rolled over .

Mike:

Avoid taking this early distribution if at all possible!

The money will be taxed at your marginal tax rate (probably 25% for the IRS and 5-8% for the state) PLUS the 10% Early Withdrawal Penalty, so the tax hit could be as high as 50%.

Better to leave the credit cards unpaid, because, if you should eventually need to declare bankruptcy, the 401K money, if rolled into a traditional IRA, is PROTECTED from the creditors in any bankruptcy action.

Unfortunately, the way your wife handled it is going to cause some problems.

You see, the 401K custodian, BY LAW, must withhold 20% of the distribution (about $2,090) and send that money to the IRS. If she then rolls the money over herself, she will have to replace that $2,090 to avoid that money being considered to be an early distribution.

Since she only made the arrangements yesterday, she should be able to fix this. Have her contact the 401K custodian and STOP THE DISTRIBUTION!

Once that is done, she can contact her bank or any number of stock brokers (I recommend Charkes Schwab) and ask them for the paperwork to do a custodian-to-custodian rollover into a traditional rollover iRA. Once she completes the paperwork and sends it to the rollover IRA custodian, THEY will do everything else by contacting the 401K custodian and arrange for the direct transfer of her 401K to the new IRA.