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dmagro · Sep 17, 2011, 08:23 AM

I recently took a total withdrawal on a 401k plan that I had from a previous employer. I had them take out 20% for federal taxes off the top. I however couldn't pay the state tax (New York) at that time. I would like to pay the state tax so I won't have any other penalties come tax time next year. Is there a way to do that?

ebaines · Sep 19, 2011, 06:27 AM

Yes - you can file an estimated incomne tax form with NY State - see: Estimated income taxes

Also - keep in mind that while you had 20% withheld for federal taxes if this withdrawal is subject to the early withdrawal penalty you will have to pay an additional 10% on top of regular income tax. So be sure to think through whether that 20% is likely to be adequate, and if not be sure to keep some cash on hand for when you file your 2011 taxes.

dmagro · Sep 19, 2011, 06:59 AM

Thank you for your prompt reply. If I but the money into an IRA (I have 60 days), will I still be subject to the penalites when I file my 2011 income taxes?

ebaines · Sep 19, 2011, 07:19 AM

If you roll the entire amount of the withdrawal to an IRA within 60 days then no, there are no taxes nor early withdrawal penalty due. The kicker is that you must roll the entire amount, including the 20% that was withheld. Which means you must come up with the 20% to add to the net amount you received in order to roll to an IRA without tax or penalty. For example: if you took a $10K withdrawal and they withheld $2K, you must establish your new IRA with the full $10K to avoid taxes and penalty. This is why if your goal is to simply roll your old 401(k) to an IRA you are much better off doing a direct rollover rather than taking a cash distribution and rolling it yourself - under a direct rollover there are no taxes withheld.

dmagro · Sep 19, 2011, 07:33 AM

UGH! They took out 9k... I cannot come up with that kind of money. Any suggestions?

ebaines · Sep 19, 2011, 07:55 AM

You might call the 401(k) plan administator and ask if it's possible to "undo" the distribution. The answer will probably be no - but it doesn't hurt to ask.

Were you under age 55 when you left your old employer? Just checking that indeed you will owe the early-withdrawal penalty.

Here's an idea - if you have a lending source that you can borrow the $9K from for the time between now and when you get your tax refund you can minimize the pain. Borrow $9K now, use it to help fund a rollover of the full amount so you owe no taxes or penalty. Since they've already withheld $9K for taxes presumably you'll get a $9K refund when you file your 2011 income taxes. Use that tax refund to repay the loan. All it costs you is interest carrying charges on a $9K loan for about 6 months - perhaps $250 or so. If you have a Home Equity Line of Credit this would be a good use for it.

dmagro · Sep 19, 2011, 08:32 AM

Spoke to the plan admin and I cannot undo the transaction. I'll have to come up with the 9k and roll it over. They did tell me though that I would get the 9k recouped at tax time. Is that correct?

ebaines · Sep 19, 2011, 08:44 AM

Originally Posted by dmagro

They did tell me though that I would get the 9k recouped at tax time. Is that correct?

Yes, just as I described in my earlier post. If you can come up with the $9K so as to roll the full amount to your new IRA within 60 days then you do not owe taxes or penalty. So you get your withholding back after you file your taxes.

One word of caution - you MUST have the new IRA set up and funded within 60 days of the date of distribution. If you're one day late (or if the mail is slow, or if the IRA custodian is slow) you lose. So be sure to get this done with a couple of weeks to spare at least.