Avoid big penalties on dissolved 401(k)s
As if layoffs and threats of layoffs weren't enough for workers to fret about, some former employers are choosing to dissolve low-balance 401(k) retirement accounts. New tax laws will soon kick in, requiring the employers to roll those balances over into Individual Retirement Accounts (IRAs).
Currently, employers can notify any ex-employee with a 401(k) balance under $5,000 that the employee must arrange to roll over the funds or be issued a check for the cashed-out fund.
But employees don't always understand the fine print: If a check is issued, the employer automatically withholds 20 percent of the balance to apply to taxes due. If the former employee then cashes the check, rather than putting it into an IRA, he must pay income tax on it, plus an additional 10 percent penalty.
IRA and tax experts are encouraging laid-off workers who maintain low-balance retirement accounts with their former employers to be vigilant, and to contact their employer to determine what the fate of the account will be. Once a worker receives a check, he has only 60 days to set up an IRA and roll over the funds - making sure he also makes up for that deducted 20 percent, considered an "early withdrawal" - to avoid the penalty. More information can be found at www.paxfund.com/newsmcenter/401knews.htm.