401k

[mellowtigger]

I have never wanted a 401k stock market "retirement savings" account.  Everywhere I worked during the last 20 years, though, has given me one even when I deliberately fail to sign the paperwork for it.  Why are companies even allowed to do that instead of pay people higher salary if they simply opt out of it?  I just now looked at the account I got from my last job (ended a few weeks ago).

HOLY MOLEY!

That's more money than I got in a whole year's salary, pre-tax.  I could immediately pay off my house and still have lots of money left over for house repairs, assuming I got the full amount by cashing out now.  Or save it all and wait out this pandemic a whole lot longer.

I might as well cash out.  The dashboard says I've already lost $5K in value this year due to stock market drops, and I expect it to get worse this year.  I just need to look up how much I'll pay in taxes and "early withdrawal" fees.

Anyone here familiar with this process and the penalties involved?  I've already looked over the Fidelity website, but it doesn't get into specifics.  I've created a new link today to my actual bank.  Once that's confirmed, apparently I need to call Fidelity to begin the closure process, so money can be delivered to the bank.

Edit 2022 July 28: I did it.  I withdrew the full amount, with the automatic deposit expected to complete on Tuesday next week.  I'll post details of the numbers and why it makes sense to do it, after all of the money movement has completed.

Comments

[zipperbear]

The government has big tax incentives to encourage savings in 401k plans, so I'm not sure why you wouldn't want to participate. You need to check you plan details to see about early withdrawal penalties. If you leave your job within the calendar year that you turn 55 or later (which I think is the case, right? You'll be 55 in November, and you left your job with that 401K during this calendar year), then the 10% tax penalty won't apply. I retired in 2018 at age 52.5, so I need to use the Substantially Equal Periodic Payments rule (and keep withdrawing until age 59.5) to avoid the 10% penalty. Hardship withdrawal rules depend on both the IRS and the 401k plan, and they're mostly big ticket items, but catastrophic home repairs might qualify, maybe.

Since it becomes taxable income, cashing out this year might bump you up into a higher tax bracket. In 2021, at $40,526 the tax bracket of 12% jumps to 22% (and another big jump of 24% to 32% at $164,926), so wait to pay off your house next calendar year, and try to keep your taxable income under about $40K each calendar year. Also, I'm expecting a big stock market recovery by the end of the year (or by election day), so cashing out now is selling low, and you want to buy low and sell high.

Your older 401k plans won't have the separation-age-55 exemption, and withdrawals there will be 10% more expensive unless you meet their specific hardship rules, so you should wait to age 59.5 to cash those out. For your current 401k, ask for the age-55 exemption when you contact the plan administrator [so your 1099R will show box 6, code 2—Early distribution, exception applies (under age 59½)], and include code 01 on form 5329 when filing taxes:

Exceptions to the Additional Tax
on Early Distributions
No. Exception
01 Qualified retirement plan distributions
(doesn’t apply to IRAs) you receive
after separation from service when
the separation from service occurs in
or after the year you reach age 55
(age 50 for qualified public safety
employees).

[zipperbear]

You can also roll over any old 401k accounts into an IRA (or possibly into a new employer's 401k if they allow, but probably only while currently employed), and the same basic pre-tax rules apply, except an IRA has no age-55 exemption.

If you have any Roth 401k accounts, withdrawals are easier since the money is already taxed (and you can roll over into a Roth IRA). But I doubt they'd automatically sign you up for a Roth 401k.

I rolled my retirement accounts into one traditional IRA and one Roth IRA; it makes the 72(t) Substantially Equal Periodic Payments easier to calculate. I was expecting a direct rollover, but wound up with four monstrously-big checks from Fidelity (payable to Charles Schwab IRA and Roth IRA, For Benefit Of me, and the same FBO my husband), and then we visited the Schwab office to deposit them.