Can you help me sort out this complicated 401(k) rollover situation?
February 17, 2016 2:45 PM   Subscribe

I have an undeposited 401(k) rollover check from when I changed jobs a year ago. I've since changed jobs again, and now I need to use a portion of that money for a down payment on a house. Is rolling it over to an IRA the right move?

I ended up returning to my previous job, but the benefits administrator says I cannot redeposit it into my 401(k) account. I can have them reissue the check to another payee. I think that the right move is to deposit the check into an IRA, then take a withdrawal using the homebuyer's exemption from the early withdrawal penalty. Is that right? Am I missing anything?

Unfortunately, the house deal came up very suddenly and this is the only source of money we have available to tap. I know it's not ideal from a retirement perspective.
posted by cabingirl to Work & Money (7 answers total) 1 user marked this as a favorite
 
Depending on the amount of money, you might want to schedule some time with a tax adviser, because I believe you must re-deposit within a certain time frame, or else you owe penalty and tax as ordinary income, unfortunately. If it's been over a year, then you have a distribution, not a rollover. So the bad news is you probably owe a good chunk of it to the IRS. If you were planning to withdraw anyway, that may be what you want.
posted by wnissen at 2:54 PM on February 17, 2016 [3 favorites]


Response by poster: The check was originally made out to the rollover administrator for my then-employer. Since I never had control of the money, it's not subject to that time limit you mention.
posted by cabingirl at 3:59 PM on February 17, 2016


Did you get that information from a 401k specialist or a tax advisor? I think it really depends on what happened to the money during the time frame that the check was cut and then never deposited - did it sit at your former employers 401k plan?

I also think there is a certain time frame you have to have the money in an IRA before you're allowed to use it for the home buyer's exemption.

I would suggest finding a tax advisor who works for a flat fee, and has worked with IRA and 401k plans. It would be worth it to spend a bit of money to make sure you've got your bases covered.
posted by lootie777 at 6:09 PM on February 17, 2016


Don't trust what HR tells you
posted by LoveHam at 8:21 PM on February 17, 2016


My understanding, having done extensive research for doing something similar, is that your understanding (including your reply) is correct. The key thing is that the check was not made out to you.

Don't forget that you will owe taxes on what you pull out - you can choose to defer them until next tax season but if you end up owing too much money as a result you could be penalized.
posted by Candleman at 9:21 PM on February 17, 2016


Also, your underwriter will likely give you some grief on the money being used for the down payment - not that they will block you from using it, but that you may have to provide seemingly extensive documentation on how it sat in limbo for a year.
posted by Candleman at 9:23 PM on February 17, 2016


Response by poster: Hi folks, for future reference I wanted to say that my original plan worked. It took about a week to get the rollover deposited into my rollover IRA account, and another few days to get it transferred to my bank. While I can get an exception on the 10% penalty due to first time homebuying, I still will owe taxes on what I withdrew.

I did have to provide a bunch of documentation for the underwriter showing where the rollover money came from originally. Also there was a snafu at closing because the underwriter thought that the wire transfer was coming directly from Fidelity, but I had transferred it to my bank account first. We had to send over some more bank statements so the underwriter would close.
posted by cabingirl at 9:07 AM on April 25, 2016


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