401k to IRA for disbursement

[GregZ626735]

All,

I really am chaffing at the prospect of having a 20% mandatory withholding for taxes when I begin taking 401k disbursements next year after I retire.  I have no problem paying my taxes but my effective tax rate in retirement will be about 11.5% at best.  After waiting 6 months to get my last refund from the IRS I am reluctant to give them a dime more than I need to at any point in time.  Especially when I still have state and local tax obligations to manage as well.

I read that IRA's don't have any mandatory withholding and I could just pay my taxes quarterly at my actual tax rate instead of over-paying out of my 401k.  Is this true?

While I do not want to move all of my 401K to an IRA and give up the legal shelter that you have with a 401k, can I periodically move just what I plan to disburse to myself from the my 401k into an IRA and pay the quarterly taxes at the time I take my disbursement?

I know there is a 60 day threshold that requires the money moved to the IRA to stay there for 60 days, otherwise the mandatory withholding is triggered.  Could I move 6 months of disbursement from my 401k into my IRA on 1/15 and 7/15 but draw out my disbursement on 4/15 and 10/15 while paying my tax obligations quarterly from my IRA disbursements rather than my 401k?

My understanding is that I can but I do not know if there is an IRS limit or timing issue.  I have tried to talk to a retirement/financial planner to get some questions answered but every single one once to bill me multiple hours at high rates or wants a big fee/percentage of my money just to answer my questions.

I already have a plan that I am going to stick to and I simply need a some answers on the best way to set things up so that they are autopilot.  I am just looking for a mechanic to talk to about this not an engineer to design me something I don't want. 

Any help would be appreciated.

[larryk678000]

You are confused.  These rules about the 20% withholding and the 60 days apply ONLY to incidences when you TOUCH the money.  Meaning---you have the 401k administrator send a check to your home.  DO NOT do that. Rather, open an IRA wherever you like (I suggest a brokerage firm because then you can invest the money any way you like- everything from insured CDs to mutual funds, stocks, etc. Then, you give the 401k administrator instructions (call them and they have a form) to send the money NOT TO YOU but directly to the new IRA.  This is called a trustee-to-trustee transfer and all of the issues you raise do not apply (there is no 20% withholding or 60--day rule).  By the way--if you want good advice, don't be cheap.  You want good advice without paying and an educated professional cannot work for free. If you need additional help, I recommend consulting with a CPA and not a financial advisor as a CPA is better qualified to address the specific issues you raise. And yes, they will charge you. 

[RonO805672]

You definitely want to move your monies from your 401k to a traditional IRA. If you no longer work at the company they are no longer a fiduciary on your behalf and your 401k fees are much higher.

[GailL1]

Are you younger than age 59-1/2 years???

Sounds like the 20% withholding is a plan specific requirement.  Is it?

[GregZ626735]

No.  I will be 62 in Feb. 

Again, my goal is, over the life of my retirement, to regularly move money from my 401k, to a qualified IRA and take disbursements from the IRS to avoid the mandatory 20% withholding. 

I think this is doable but am i restricted by the IRS to one rollover per year?  As long as I leave to money in the IRA for at least 60 day, do I have any tax issues to worry about, other than normal tax issues? 

[GailL1]

Get help doing this if you feel you need it.

ROLLOVERS and DISTRIBUTIONS are (2) DIFFERENT things.  Make sure you understand the difference.

A ROLLOVER is just where you are moving a specific amount out of your TRADITIONAL 401K to a TRADITIONAL IRA. 

There are various ways to actually physically do the rollover - doing it in a direct method where you never touch the money at all is probably the easiest and isn't taxed.  

This IRS link describes the process in detail - read all of it but I have copied and pasted a few noted items below the link in italics so you will understand the (NO) tax consequences on a traditional ROLLOVER - 401K > IRA.

IRS.gov - Rollovers of Retirement Plan and IRA Distributions

from the link:

How do I complete a rollover?

1. Direct rollover – If you’re getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. Contact your plan administrator for instructions. The administrator may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount.
    
2. Trustee-to-trustee transfer – If you’re getting a distribution from an IRA, you can ask the financial institution holding your IRA to make the payment directly from your IRA to another IRA or to a retirement plan. No taxes will be withheld from your transfer amount.
    
3. 60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan (see below), so you’ll have to use other funds to roll over the full amount of the distribution.

IRA one-rollover-per-year rule 

You generally cannot make more than one rollover from the same IRA within a 1-year period. You also cannot make a rollover during this 1-year period from the IRA to which the distribution was rolled over.

Beginning after January 1, 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own.  The limit will apply by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit.

The one-per year limit does not apply to:

• rollovers from traditional IRAs to Roth IRAs (conversions)
• trustee-to-trustee transfers to another IRA
• IRA-to-plan rollovers
• plan-to-IRA rollovers
• plan-to-plan rollovers

Will taxes be withheld from my distribution?

• IRAs: An IRA distribution paid to you is subject to 10% withholding unless you elect out of withholding or choose to have a different amount withheld. You can avoid withholding taxes if you choose to do a trustee-to-trustee transfer to another IRA.
   
• Retirement plans: A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement plan or to an IRA. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding.

-------------------------------

Now some people decide to do a CONVERSION to a ROTH IRA rather than a ROLLOVER to a TRADITIONAL IRA - In the case of such a CONVERSION, ALL taxes based on your own tax rate will be due in the year of the CONVERSION on such an amount because a ROTH is an after tax retirement plan and the subsequent earnings (after 5-years in the plan) grow tax free.

DISTRIBUTIONS come directly to you for your use from your retirement plan.

Any DISTRIBITION from your TRADITIONAL 401K OR your TRADITIONAL IRA are coded as DISTRIBUTIONS and thus taxes have to be paid on this distributed amount - you will pay taxes on this DISTRIBUTION amount at your ordinary income tax rate.  

Make sure you understand the terminology 

ROLLOVER

DISTRIBUTION

CONVERSION

[GregZ626735]

thanks.  from your info i suspect that some of this is dependent on my 401k.  They have said that I can roll-over any amount or all of money to an IRA as many times a year I want until there is nothing left in the 401k.

That said.  I want to roll-over a portion of my 401k into an IRA without paying taxes on the rollover. No conversion. All good.  I don't care if it is once a year or at will, i just want a straight pre-tax 401k rollover into a pre-tax IRA.

I want to take distributions from my pre-tax IRA.  Preferably quarterly but again, I don't care.  I just have to make sure the moey is in the pre-tax IRA at least 60 days from when I roll it over from my 401k. I just want to know how often to do it.  Again, this sounds all good.  I don't want to have any withholding taken out of my distribution as I will pay it quarterly.  I believe i can do that only with an IRA and I must fill out a W-4P and select 0 withholding.  From your response, that sounds doable as well.

Does my interpretation align with your response?  Do I have something wrong or missing?

[Tonster521]

@GregZ626735 You are correct that the provisions of the 401 k Plan will govern. I suggest obtaining the most recent Summary Plan Description (SPD) and/or the Plan Document whichever is available.If your Plan is qualified pursuant to ERISA, the Plan Document and all amendments to the Plan will govern. The Plan Document will specify the forms of Distributions that are available. This is important because you indicated that you wish to elect Distributions (Direct Rollovers to an IRA) over the life of your retirement (your second post on 9/22/2021). Please note that you need to elect RMDs at your Required Beginning Date (currently age 72). You cannot rollover your RMDs. Some Plans that do not want the costs and burdens of RMD distributions as well as tax withholding, may have a provision that distributes a Participant's entire interest in the Plan by his/hers Required Beginning Date (RBD). So, to avoid the harsh 20% withholding on one's entire interest in the Plan upon attainment of RBD, a Participant must elect a Direct Rollover before the RBD. You should check with a legal expert to determine if your State provides the same protection that ERISA provides in the event of bankruptcy and/or creditors. Protection varies from State to State. Remember, 401K Plans are not protected from liens from the IRS or from Qualified Domestic Relations Orders (ex-spouse, child support). If your State provides the same protection as ERISA, you may find it less cumbersome to effect a Direct Rollover of your entire interest in the 401 K Plan. However, if you have Company Stock in the Plan that has appreciated over the years, you should seek tax help regarding Net Unrealized Appreciation (NUA). If the NUA is significant, the tax savings will far exceed any temporary cash flow delays waiting for the IRS refund. Hope this helps.    

[sktn77a]

Most 401k programs permit a direct rollover into an IRA.  Just make sure the check is made out to the new institution and NOT yourself!