New 401(k) account, barely funded: can I withdraw penalty-free?
I established a new 401(k) account with my previous employer. I made a total of 0 in contributions (0 x 6).
I don't want to keep this 401(k). First, 401(k) is not my preferred investment strategy. Second, the fund manager has me earning an absymal 0.01% (I have savings instruments better than that!). Third, if I could liquidate this money I could put it to a short investment that would give me a better return.
Does the IRS have any "small amount" rules that would work to my advantage? Or do I just go ahead and pay the penalty?
EDIT: Everyone's situation is unique. Answers are rarely simple. I invest in hard assets, while my spouse in investment accounts. I established this account to take advantage of the employer match, presuming I would be there for some time. Turns out, that wasn't the case. Since I don't invest in soft accounts, I want to liquidate this account.
I can't transfer to my spouse. I can't keep it where it is. I can roll it over to an IRA, then convert to a Roth IRA, but the fees would likely eat it up before the 5 year waiting period for no-penalty withdrawals kicks in. I don't have more than 7.5% AGI unreimbursed medical expenses, so I'm seeing no way to get around the 10% penalty.
(3)3 Comments
Sorted by latest first Latest Oldest Best
For such a small amount, I really don't think it's worth the time and effort to withdraw it. Why not roll it over into a traditional IRA or a new 401k / 403b?
If you withdraw the money, regardless of how small the balance is, the IRS will still insist you pay a 10% penalty when you file your taxes (assuming you're under 59 1/2). Your 401K plan provider might have a policy that allows you to avoid the usual automatic withholding. You should check with them. 0 in additional income isn't likely to move your tax bill much, unless you're really close to a boundary in the tax brackets.
Rather than withdrawing the money, you can transfer the 401K to your next 401K, or roll it over to an IRA (plenty of no-fee options around). Once in a traditional IRA, you can convert the money to a Roth IRA. You pay the taxes on the amount, but no 10% penalty. Converting to a Roth has eligibility rules. You should double check with your financial institution before doing it.
Edit: You can withdraw without the 10% penalty if you leave your job after age 55 (credit to @JoeTaxpayer for the correction). This IRS Page lists the conditions under which the penalty can be avoided.
Edit: The original question has been edited to add more background details. Due to OP's investment preferences, I would also recommend that he simply withdraw the funds, pay the taxes and the penalty and put the 0 or so dollars somewhere else.
You can transfer 401(k) funds from a previous employer to an IRA, and invest it as you wish.
That 0 should go to the current 401(k) or IRA.
Edit - OP has edited his question. I agree with him that each situation is unique, therefore 100% of the details are needed up front to avoid the answers that would be right for everyone else. He offered a valid reason for rejecting the current advice. There is no solution except to simply withdraw the money. It went in pretax, so taxing on way out is not a penalty. The 10% is the real penalty, and it's in this case.
Terms of Use Privacy policy Contact About Cancellation policy © freshhoot.com2026 All Rights reserved.