Mother cashed out the 401k

[mrpaseo]

I have not heard the full story but I heard (Through my wife) that my mother cashed out her 401k.

I do not plan on beating her up (Verbally) about this; I want to make sure she has the penalties covered. So, what are the penalties for closing out your 401k?

I believe there is a 10% penalty, plus taxes paid on the balance. Is that correct?

Thanks for your advice

[maat55]

Depends on what she uses it for but your right if it is a unqualified distribution. One exemption would be medical costs over a certain amount of her income.

[mrpaseo]

How I understand it, they were "Losing too much money".

Back when the NASDAQ bubble popped (The Dot.com era) they "Lost" some money and it took awhile to climb out. They were afraid to do this again.

They used the money to pay off bills/car etc. As I understand it the only thing that is left is the house. I am afraid they did not cover the penalties and all they did was trade one debt for another but now they have no investments.

[mrpaseo]

If I remember correctly, about a year ago they moved their assets into the money market equivlent in their 401k to limit their losses (At the time it was not a great idea, but looking back now, they saved a lot of money). I am assuming they were looking at their bills, the balance of this account, and the their investment shares that they were in...still going down.

Thinking how long it would take them to get back to where they were before the drop, they figured (BTW they are late 50's and early 60's) it would be best to just cash out and break even on the bills... I guess.

They have not contacted me (Probably do not want to hear me lecture them) so I will probably let it go until I get home in February to talk to them face to face.

My only fear (And the reason for this thread) is the penalties.

Thanks for reading,
Raymond

[Like2Plan]

It is your Mom's account? How old is she exactly? Is she retired?

How long ago was this done?

[creditcardfree]

When you withdraw from a 401K or Traditional IRA, the withdrawals are taxed as ordinary income and plus a 10% penalty unless the withdrawal qualifies as an exception. If they are over age 59 1/2 the penalty does not apply.

Check out irs.gov for more information!

[mrpaseo]

Age

It is your Mom's account? How old is she exactly? Is she retired?

How long ago was this done?

As I mentioned I do not know the particulars, I do know that my mother was born in 52, that puts her at about 56 years, 9 months, 9 days (Give or take a few hours). She is not retired (Still works, no pension).

My step father is in his 60's (For sure) I know they both had a 401k, maybe it was his that they cashed out. Since there would be only taxes and no penalties as Jim explained.

I just realized the bind, my plan was to wait until I get home (In February) to talk to them about this, but if I wait that long they do not get the chance to pay the money back without the penalty. That said, my wife implied that the money was already spent. I'll get more info today from the wifey and see if she might call Mom back.

Thanks for the questions,
Raymond

[Like2Plan]

As I mentioned I do not know the particulars, I do know that my mother was born in 52, that puts her at about 56 years, 9 months, 9 days (Give or take a few hours). She is not retired (Still works, no pension).

My step father is in his 60's (For sure) I know they both had a 401k, maybe it was his that they cashed out. Since there would be only taxes and no penalties as Jim explained.

I just realized the bind, my plan was to wait until I get home (In February) to talk to them about this, but if I wait that long they do not get the chance to pay the money back without the penalty. That said, my wife implied that the money was already spent. I'll get more info today from the wifey and see if she might call Mom back.

Thanks for the questions,
Raymond

I was thinking if it was your step fathers--no penalty. If the money is gone, then there is probably little you can do.

On the other hand if there were some funds left, I was thinking maybe this move was a stroke of genius--if they could roll over into a Roth at market bottom (I'm not sure if this is a 1 step or 2 step process--you used to have to roll over to a regulare IRA first and then convert it, but I'm not sure you have to do that anymore).

But, it sounds like they may have lost their nerve with the market and it might be difficult to talk them into getting back into investing.