Ramsey Everyday Millionaires: Episode Summary Episode Title: My 401(k) Was Closed Without My Knowledge
Host/Author: Ramsey Network
Release Date: January 27, 2025

Introduction

In this episode of Ramsey Everyday Millionaires, the hosts delve into a concerning issue faced by one of their listeners, referred to as A, who experienced an unexpected closure of his inherited 401(k) account. The episode provides valuable insights into managing inherited retirement accounts, understanding recent legislative changes, and navigating unexpected financial setbacks.

Unexpected Closure of the 401(k) Account

A shares a distressing personal experience:

"[00:18] A: So I have a bit of a problem. I never thought this was going to happen. So in 2018, my father passed away and he left me and my brother a 401k plan. Fast forward 5 years. I got a check in the mail this morning for about 245,000. The original account balance was about 300,000. And what's happening is they gave me the check and I have to pay the IRS that 55,000 difference from the 300,245."

A inherits a 401(k) from his late father, expecting the account to remain active until retirement. However, five years later, the account was forcibly closed, resulting in a significant tax obligation.

Discrepancy in Funds and Lack of Communication

A elaborates on the discrepancies and the lack of clear communication from the 401(k) provider:

"[00:58] A: Not me. They have a five year plan, I guess for the death benefit, that if it's not rolled over to something else within five years, they must close the account and just issue a checkout. It's super confusing the way they explained it to me."

Despite maintaining the account for five years, the provider closed it without A's explicit consent or proper notification, leading to confusion and financial strain.

Tax Implications and the SECURE Act

B explains the tax withholding and references the SECURE Act:

"[02:32] B: I'm a truck driver, so I make about 110,000 a year. And I also own a small business that I make about the same."

"[02:42] B: Okay. Under the Secure act that Biden passed, you have 10 years to liquidate the 401k completely. You should have been liquidating it at 1 10th a year from the time the SECURE act passed two years ago. And you've not been doing that."

The SECURE Act, implemented to extend the time frame for liquidating inherited retirement accounts, plays a crucial role in A's situation. A was unaware of this legislation, which could have potentially provided more flexibility in managing the inherited 401(k).

Navigating the Financial Setback

B offers practical advice to A on mitigating the financial impact:

"[03:54] B: It should have been huger. Yeah. All right, so here's. Here's what I'm going to suggest you do. And I don't think it'll work, but it's the only thing I can think of. All right."

"[04:05] A: Okay."

"[04:06] B: Go to ramseysolutions.com and click on SmartVestor and find a SmartVestor Pro in your area that you like. After talking to them on the phone, they may be able to call on your behalf and talk them into undoing this and immediately rolling it. And they'll help you with the rollover."

B recommends engaging with a financial professional through Ramsey's SmartVestor service to potentially reverse the account closure and facilitate a rollover, which could minimize tax liabilities.

Understanding Withholding and Tax Responsibilities

A and B discuss the specifics of tax withholding related to the involuntary withdrawal:

"[06:56] B: Honey, you haven't paid anything yet. Okay. They withheld your money, 55,000, and sent it to the federal government. Then what you do is you file a tax return of what is actually due. And what will be actually due is not 55,000. It'll only be the taxes on 55,000 if you take the check in your hand and put it into an IRA traditional within 60 days of right now."

A learns that while a significant portion of his inheritance was withheld for taxes, he has the opportunity to mitigate further tax consequences by rolling over the remaining funds within a specified timeframe.

Key Takeaways and Recommendations

1. Stay Informed About Legislative Changes:

   • Understanding laws like the SECURE Act is crucial for managing inherited retirement accounts effectively.

2. Proactive Communication:

   • Maintain regular contact with your 401(k) provider to stay updated on account statuses and any impending actions.

3. Seek Professional Advice:

   • Engaging with financial advisors, such as those available through Ramsey's SmartVestor, can provide personalized strategies to manage and rectify financial setbacks.

4. Act Within Deadlines:

   • Tax implications related to retirement account withdrawals require timely actions, such as rolling over funds within 60 days to minimize tax liabilities.

Conclusion

This episode underscores the importance of vigilance in managing inherited retirement accounts and staying abreast of legislative changes that impact financial decisions. A's experience serves as a cautionary tale, highlighting the potential pitfalls of passive account management and the critical role of professional financial guidance in safeguarding one's financial future.

For those facing similar challenges, the Ramsey Network emphasizes the value of proactive financial planning and the resources available to navigate complex situations effectively.

Notable Quotes:

• A at [00:18]: "I never thought this was going to happen... I have to pay the IRS that 55,000 difference from the 300,245."
• B at [02:42]: "Under the Secure act that Biden passed, you have 10 years to liquidate the 401k completely."
• B at [04:06]: "They may be able to call on your behalf and talk them into undoing this and immediately rolling it."

For more insights and resources, visit RamseySolutions.com and explore the SmartVestor services to connect with a financial professional near you.