Tax issues of withdrawing assets

Published: 2020-04-27 11:10:17
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401K account is a defined pension scheme in USA, provided under sections of Internal Revenue Code, adopted into law in 1978. The rewards of the accumulated periodical contributions, such as dividends, capital gains and interest of the savings relating to the 401k account contributions, both contributions of the employer and employee into this scheme are subject to deferred tax. Simply it is a retirement saving plan established by the Act of Parliament (Caminada, Goudswaard & Wang, n.d.).

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Withdraw of savings from 401k account opened while at Targets employment need some further verification that his former employer-Target, had vested Adam. Initiation and authorization of the withdrawal from Target 401k account without employer vesting, Timothy indefinitely loses the employers contribution.

Adam should write to his former employer and request for a direct transfer of his Garner 401k account balance to his new 401K account or IRA. On the other hand, if Garner, the former employer check Adam directly, withholding tax of 20% of the account balance is charged. This tax liability can be reduced by avoiding direct receipt of the savings from the employer (Fenge & Werding, 2004).

Besides, if Adam is below 59 1/2 years of age he is subject to 10% early withdrawal penalty, if Adam transfers his assets from an old 401k account into a newly opened 401k account. Therefore, Adam should avoid rolling the old 401k account balances with his former employer into a newly opened account, this way he avoids 10% early withdraw penalty.

Transferring Targets 401k account balance to an IRA account, shall be a good choice considering that IRA allows room for the employer to negotiate cheaper investments options for their employees savings. Where the cost of investment is relatively cheaper with the IRA, a move of assets to an IRA account is a good move (Kiesewetter & Niemann, 2003).

Rollover IRA accounts minimum opening cost is $0.00.

Traditional IRA minimum account opening charge is $2500.00, $200/mo.

Brokerage saving account opening minimum charge is $2500

The client Adam, should not opt to open an account at the brokerage firm of his financial adviser since it has a single offer of minimum account opening cost of $2500 per annum compared to rolling over his old 401k plan account balance to an old traditional IRA account which offers an additional option of $200 per a month as shown above.

Adam being younger than 55 years of age will have to pay a withholding tax of 10% as a default charge which will be deducted to any account that he prematurely withdraws. This implies, if he does not converge his 401 k account balances to a common existing 401 k, he would not suffer any withdrawal penalty. He has another option of avoiding early withdrawal penalty charge by requesting his former employee to directly check his 401k account balance to his new or existing IRA or 401k account. Failing to authorize any transfer transaction before the age of 59 1/5 years, he avoids losing his saving to early withdraw penalty (Uccello, Favreault, Smith & Thompson, n.d.).

Adam, shall reduce his tax liability, if he files his withdraw claim from old existing IRA account, under withdraw rule- Call to active duty. Following, qualified reservist distribution amendment effected from 11th September 2011. Distributions covered by this provisions receive withholding state and federal tax waivers. He should file the claim after a period of excess of 179 days in active duty.

References

Caminada, K., Goudswaard, K., & Wang, C. Disentangling Income Inequality and the Redistributive Effect of Taxes and Transfers in 20 LIS Countries Over Time. SSRN Electronic Journal. doi:10.2139/ssrn.2168885

Fenge, R., & Werding, M. (2004). Ageing and the tax implied in public pension schemes: simulations for selected OECD countries. Fiscal Studies, 25(2), 159-200. doi:10.1111/j.1475-5890.2004.tb00101.x

Fenge, R., & Werding, M. (2004). Ageing and the tax implied in public pension schemes: simulations for selected OECD countries. Fiscal Studies, 25(2), 159-200. doi:10.1111/j.1475-5890.2004.tb00101.x

Kiesewetter, D., & Niemann, R. (2003). Neutral Taxation of Pensions in a Comprehensive Income Tax. Finanzarchiv, 59(2), 227-248. doi:10.1628/0015221032643191

Uccello, C., Favreault, M., Smith, K., & Thompson, L. Simulating the Distributional Consequences of Personal Accounts: Sensitivity to Annuitization Options. SSRN Electronic Journal. doi:10.2139/ssrn.1138349

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