401(k) mandatory withholding?

Question

As I understand it, any withdrawal from a 401(k) requires a 20% Federal tax withholding. And if one separates from their company, post-50, there's no penalty for early withdrawal. A dry run of 2014 taxes shows no federal tax due at all on the intended $60K withdrawal. A combination of Property tax, some mortgage interest, rental losses carried forward for two decades, etc. For such a couple, is there any way round this withholding requirement?

59-1/2 is still a few years away, so an annual IRA transfer would do it, but for now, any ideas?

Seems a shame to have a forced annual loan to the government.

Alan · Accepted Answer

There are three exceptions to the 20% mandatory withholding for a distribution that is eligible for rollover. You can find them in IRS Pub

15A and 505.

Distribution was required by law (e.g. your RMD).

Distribution is one of a series of equal payments.
Distribution is a qualified hardship withdrawal.

From your set of facts, you would be subject to the 20% rate.

Arthur Kamlet · Answer

Just to add: There was mention of separaation from service post-50 and not suffer the 10% additional tax:

If you have separated from service with the employer in a year you were age 55 or over (make that 50 or over if you are a public safety officer) you do not have to pay the additional 10% tax.

JoeTaxpayer · Answer

Typo, I meant 55. Thank-you for correcting. And on thinking on this,  59-1/2 comes in 2015, so this issue is just for '14.

401(k) mandatory withholding?

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