401k question

"The" 10% penalty? If you are referring to the federal penalty, you can avoid it by rolling over those funds into an IRA within 60 days. However, you must cover the withholding with your own funds to avoid a (federal) 10% penalty on that amount.

(If you did an electronic custodian-to-custodian transfer, there is no federal 10% penalty to worry about.)

That would be a Vanguard penalty. In addition to "the" 10% penalty? In any case, that penalty cannot be avoided by doing a rollover.

This is a legal question, not a financial planning question. You would do better by posting to misc.legal.moderated. Better still, of course, you might consult an attorney. Most attorney's will tell you where you stand, in broad terms, without charging you.

(That is not to say that you have a legal right. Arguably, you should know when the account was opened and the terms for closing the account.)

But before you go down that path, you should consider speaking with a manager at Vanguard. Be polite, even contrite, certainly not angry; and never threaten legal action or make a legal argument. Simply say exactly what you wrote above. They will probably forgive the larger Vanguard penalty.

A similar thing happen with my mother. When she withdrew a very large sum to roll over to another account, no one informed her that interest for the month would not be paid unless the money was in the account at the end of the period. (Yup, no proration. Surprise!) She was only a few days shy of the end of the period.

The "plebes" insisted there was nothing that could be done; those were the rules. When we spoke with the manager, he understood our position. Not only did he pay the interest, but also he forgave the account closing fee.

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Never good to let emotion get the best of you. There is a 10% penalty for early withdrawal, and a withholding for taxes of 20% (I'd not heard that it's 25) but I don't know that 2 yrs meant anything anyway. The withholding is when you take a 401(k) out and don't roll it over to another account.

What you should have done was go to a broker who doesn't piss you off and open an IRA, send Vanguard the paperwork and have them send the

401(k) money directly to that broker. Now, you'd have to get that money elsewhere and open the IRA yourself if you'd like to avoid the tax and penalty.

Joe

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You commit financial hara kiri just because you are mad at the management company? It's the classic cut of your nose to spite your face. You may still have time to roll it into an IRA to avoid the penalty.

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This question makes no sense, what's the account type and what is this penalty?

If you mean "withholding," meaning money kept back by Vanguard and sent to the IRS for taxes, it should have been 20%, not 25%, unless there's some state tax withholding as well. If you mean "penalty" it's 10%, plus perhaps a state penalty -- but it wouldn't be 25%. And there's no significance to two years in either case.

You might have lost some vesting after two years, I guess that's a possibility. Or - was a SIMPLE IRA, rather than a 401(k)? Those have a

25% levy (federal) if you take a distribution within the first two years.

More important: why would you blow away your retirement savings just because a mutual fund company upset you? Cutting off your retirement to spite your custodian, to paraphrase a bit. It's worse than just that penalty, because you also have to pay federal and state income taxes as well. Unless you're in a low tax bracket you could end up with less than

50 cents on the dollar.

-Tad

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I think the original poster is talking about the surrender scale that some have, I know I have a Sun Life policy that is also on a 7 year surrender scale. It starts out at X% then after each year gets less & at 7 years is zero penalty for rolling into some other fund. Yes it has nothing to do with the Federal penalty

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Sun Life is an insurance company. You have a retirement annuity. The fee you are referring to is a contingent deferred sales charge (CDSC). They are common to annuities. I am fairly sure this isn't what the OP was referring to.

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I see........ Thanks yes Sun Life is a insure co that I have the IRA with. Do funds such as Vanguard also have a surrender scale if rolling or cashing out occurs in the first few years? I was just looking at a fund from them (VWELX) I did not see any mentioned

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Generally not, at least not like the ones that annuities impose. Many funds impose a "redemption fee" for shares held for less than some nominal period, typically 90-180 days. The redemption fee is usually relatively small, typically 1-3%.

Nonetheless, I also assumed that the OP is talking about some kind of surrender fee, since the OP wrote that the agent said the "25%" penalty would not apply if the account is maintained for at least 2 years. That not be characteristic of backup withholding (28%) or withholding on 401(k) withdrawals.

However, 25% seems a little steep. If it is a redemption fee, I suspect it is 2.5%, not 25%. Alternatively, perhaps the OP is simply confused.

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That is, amongst true "no-load" funds, like Vanguard.

If you're talking about broker-sold funds with loads, there are classes of the fund where you pay a load up front (A shares) and there are classes of the same funds which, instead of imposing that load up front, spread it across several years (B shares) - and if you sell before those several years are up, they take out the remaining several years worth of load payments. This is called a Contingent Deferred Sales Charge or CDSC. (google for more info).

In general, if you are selecting your own funds to buy (or paying a fee-only advisor to do so), you should not be buying such funds.

It was a surprising and somewhat odd number. I hope the OP will let us know what, exactly, it really was. (both amount and explanation).