My 401(k) Was Closed Without My Knowledge

Summary

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

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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.

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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.

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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.

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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).

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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.

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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.

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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.

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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.

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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."

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

Transcript

[A]

This episode is brought to you by SmartVestor. Connect with an investing pro near you.

[B]

At RamseySolutions.com SmartVestor Ryan is with us in Hartford, Connecticut. Hey, Ryan. Welcome to the Ramsey Show.

[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. I called them and asked them if they could roll it over and they said once they issued the check, there's nothing that can be done.

[B]

Who told them to issue the check?

[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. I was on the phone with them for an hour and a half this morning with my 401k company and they pretty much said once we issue the check, there's nothing that can be done. There was no workaround.

[B]

Yeah, there.

[A]

They had, they had until. That's what I'm saying.

[B]

I'm sure you don't have an extra 55 grand laying around.

[A]

No. So the way it worked is my account balance is 300,000. It started like 215 and over the years I got it up to 300. They issued me a check for 245. They already took the money out and sent it to the irs. And it should be the difference.

[B]

Yeah. They have to withhold 20%. That's the rule. If you, if you take away. But this is an involuntary withdrawal without any contact to you or anything, which is completely, at a minimum, unprofessional.

[A]

What caused you to wait the five.

[B]

Years as opposed to rolling it over?

[A]

Because the 401k plan my father was invested in had really good options like I built up.

[B]

All of those same options exist in the open market.

[A]

Yeah. And I have my own personal investment accounts and I do it with that as well. Don't rock the boat if the boat shouldn't be rocked. So the way I figured is the 401k plan was perfectly fine. I kept it in there just because the investment options were fine. It was just. It's a retirement account. I was treating like a retirement account. I wasn't going to touch it till I was 65. I'm 30 now.

[B]

Yeah. What do you make?

[A]

I make. 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.

[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.

[A]

I didn't know about that.

[B]

I know. So I'm trying to figure out how that plays into this and how hardcore. All right, let's pretend that we figure out a way to lean on them and they cancel the check and put the money back into the 401k so that you can roll it over within 30 days, which is what they should do if they're are people of integrity. This is a problem. It's not technically unethical. It's just so nasty that it ought to be unethical. What they.

[A]

Yeah, it's a big.

[B]

It's going to cost you. It's going to cost you, you know, 20, 30,000 bucks and that you don't have.

[A]

It cost me two years. It cost me two whole years of. Of gains because of this. I never thought I would be upset to get a huge check in the mail, but I did. And, well, I'm upset because I should have had it rolled over.

[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.

[A]

Okay.

[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.

[A]

Okay.

[B]

They may be able to cite something that a regulation or something that I'm not aware of. When you started talking, I thought you were going to tell me this was a tiny little 401k, like a $10,000, and they were just cleaning out all the little ones. Sometimes they do that when a company sells or in the event of an inherited 401k like you've got. But this is huge. This is a lot of Money. And so this is. And with no notification at all, this is particularly nasty. And so if they had simply notified you, you could have quickly rolled it over and avoided this.

[A]

Right, and they said they notified me, but I.

[B]

Wait a minute, you didn't.

[A]

They did notify you My account. They said they did, but I never got any notification. So you've never seen evidence.

[B]

Ask them to prove that they did.

[A]

Okay.

[B]

Okay. So, yeah, I mean, I don't. I don't think you've got a basis for suing them, but I'd be tempted to. I really would. I mean, because you're talking about 25 or $30,000 cost here. That is unnecessary.

[A]

5,000. They took out they.

[B]

Taxes on 55,000. The 55,000 is going to be taxed, not penalized.

[A]

No, they. When I got my experiment, like the summary of what my original account balance was 300,000, they got me a check for 245.

[B]

I understand they took 55,000. They sent it to the federal government as tax withholding. And it's not all taxable, so. Because the entire cause you're gonna roll the rest of this. If you take the check in your hand and you roll it to a 401k, the only harm that's gonna come to you is the taxes on the 55,000, which is gonna be 15 grand or 20 grand.

[A]

Oh, so I'm gonna have to pay another 15 grand.

[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. So you need to get on the phone with a smartvestor pro right now, because at least we need to do that.

[A]

Okay, I will, but.

[B]

So the worst case scenario, if you follow through on what I just told you, is taxes on $55,000 because the government has 55,000 of your money, as if you're going to get taxed on the whole thing and you're not, because you're going to roll the portion in your hand, which is 80% of it, into a traditional to keep you from getting taxed. You got 60 days to do that from the time of withdrawal. So, folks, you can pull your money out of 401k. They have to withhold 20%, but you have to put 100% into an account within 60 days to avoid taxation. You can't do that because they can't do that because they got 55 of his money over at the IRS now. And so if you just take the. Take the 55, then you're going to pay some taxes, but not 55. So there we go.