Question

Isaiah has been working for CNN for a total of four years. CNN offers Isaiah a 401(k) plan. At the end of the fourth year of working at CNN, Isaiah leaves and begins working for MSNBC – which also offers a 401(k) plan.

When Isaiah leaves CNN, his 401(k)-account balance is $54,000, of which:

• CNN’s contribution = $30,000
• Isaiah’s contribution = $20,000
• Interest earnings = $4,000.

1. Upon leaving CNN, how much of the 401(k)-account balance can Isaiah take with him at a minimum? (3 points)

Answer 1

Following are the rules for cash out of 401(k) account balances-

1. If your new employer offers a 401(k) plan, check your eligibility and enroll yourself.
2. Once enrolled, get the funds and investments in your old account directly transferred to your new account. You can opt for a direct administrator-to-administrator transfer through simple documentation to avoid potential taxes and penalties.
3. Instead of direct transfer, you can also cash out your old account and deposit the proceeds in your new account within 60 days of cashing out. That way, you don’t have to pay income tax on the amount of the withdrawal (which is treated as distribution).
4. You must start taking 401(k) distributions after you turn 70 ½ years old and you are not working anymore. However, unlike traditional plans, in a new retirement plan with your current employer, you cannot be forced to take the required minimum distributions even after you reach the age of 70 ½.
5. If your new employer does not have a 401(k) plan or you do not like the plan your new employer has, you may roll over your old 401(k) account to an IRA. The rollover process is like the process of rolling over to a new account. You can either get it done directly through your plan administrator or take out the proceedings and deposit them in your IRA within 60 days.

The following are some tax rules regarding your old 401(k):

• When you leave your 401(k) account with your old employer, you need not pay any taxes until you choose to withdraw the funds.
• Even when you roll over your old 401(k) account to your new employer, you need not pay any taxes.
• At the time of your 401(k) distributions, you will be liable to pay income tax at the prevailing rates applicable for such distribution.
• If you haven’t reached the age of 59 ½ years at the time of distribution, you may be liable to pay a premature withdrawal penalty of 10%, subject to certain exceptions.
• Distributions from a designated Roth account are tax-free after you reach the age of 59 ½ years, provided your account is at least five years old.

in the given case,

When Isaiah leaves CNN, his 401(k)-account balance is $54,000, of which:

• CNN’s contribution = $30,000
• Isaiah’s contribution = $20,000
• Interest earnings = $4,000 and isaiah has worked for 4 years.

Assuming Isaiah has not reached the age of 59 1/2 years , in case of withdraw of the amount , 10% penalty will be charged for early withdrawl.

Hence amount can be withdrawn- $54000-10% = $48600

------------------------------------------------------------------------------------------------------------------------------