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Question for the Money Doctors

Question submitted on Jan 15, 2014.


65 yr old single with 401k 100k retiree status. Need to take out 10k from acct and roll over the rest . How do I do this without too much tax penalty. And what should I rollover to?


You didn't indicate if your 401(k) includes any stock of your former employer. If it does, you may be eligible for a special tax benefit called "Net Unrealized Appreciation (NUA). A full discussion of that is beyond the scope of this response but, in brief, if you qualify and elect to take advantage of this benefit, it would allow you to pay a lower capital gains tax rate on the appreciation in your employer stock (instead of paying higher ordinary income tax rates).

Assuming that none of your 401(k) account includes employer stock, or you choose not to take advantage of NUA, the first thing you should do is roll over your entire 401(k) to an IRA account. The reason for this is that if you take a distribution from your 401(k), the plan sponsor will be required to withhold 20% income tax from the amount that you take. To accomplish this rollover, you should arrange to have your 401(k) balance transferred directly from the plan to a IRA custodian. If you have the plan make a distribution directly to you, 20% withholding is required even if you tell the sponsor that you plan to roll the distribution over to an IRA within the 60-day period during which that would be permitted.

Once you've got the money in an IRA you can take a withdrawal of any or all of your account without any mandatory withholding. Of course, you'll have to pay income tax at ordinary income tax rates on any distribution that you might take. However, no penalty taxes will apply since you''re over 59 1/2 to any distribution that you take regardless of whether it comes from your 401(k) or if you first put the money into an IRA.

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