Cashing in Simple IRA?

jwhite480 · #1 (**permalink**) 10-14-2007, 03:46 PM

Let me start with a bit of honesty. My credit is way less than perfict.

It took some doing, and several years, but I did manage, with my wife's help, to widdle down all of my old debt. In fact widdled enough that we managed a morgage for our home, which we just purchased this year June.

I do not believe that if I did not have the VA I would have ever qualified for a loan.

Now we are in our new home, and our savings is still very small. I am the only one working, and we are just staying afloat paying the morgage and other bills.

I have an old Simple IRA from a previous employer. My new company has a 401k. I was told that I cannnot roll over the IRA so I left it where it was. I cannot contribute any more money to it, but it does draw a little interest. There is only about 10,000 in the account.

Our car is old, and needs replacement. I am considering cashing out the old IRA and using the money to buy a car.

My question is: Of the 10,000 how much money would I have, after penalties and taxes?

Dru · #2 (**permalink**) 10-14-2007, 09:25 PM

Your penalty is 10% plus your current tax bracket. So if you are in a 20% bracket+10%, you could be giving up about 1/3 of the total value. Not too nice.

Why not talk to a financial planner and move the IRA into something that pays a better return. Stop funding the 401 for a while and put that money into a MM savings account @5% (probably close to what most company 401's are doing- they like low risk) or into a mutual fund or something showing a better return. This would help you save up quickly for that new car. If you can save and pay cash, you will pay with dollars that earned interest instead of money that cost interest and be able to have lower cost insurance as well.

Good luck.

GarySpicuzza · #3 (**permalink**) 10-18-2007, 09:00 AM

jwhite480 wrote:

"My new company has a 401k. I was told that I cannnot roll over the IRA so I left it where it was."

IRAs are allowed by law to roll into 401k qualified plans as of 2002. However, this does not necessarily mean that your company's plan allows it. Each plan can elect whether or not it will accept rollovers from other qualified plans and whether or not it will accept rollovers from IRAs.

That being said the determining factor here - whether or not your company's 401k plan accepts rollovers from IRA accounts. Check again with your human resource department or your 401k plan administrator.

System would not allow me to post link because I don't have 15 posts so...

See chart at: www DOT irs DOT gov/pub/irs-tege/rollover_chart.pdf

Dru · #4 (**permalink**) 10-18-2007, 11:54 PM

Thanks Gary. Always good to have clarification on specifics like this. I believe there are also rules about when you can pull your 401k out from your company to do your own thing, sort of like vesting or within so many years of retirement. The key is to keep qualified money separate from non-qualified money.

Here is your link:
www.irs.gov/pub/irs-tege/rollover_chart.pdf

jwhite480 · #5 (**permalink**) 11-04-2007, 09:58 AM

It must be that my new plan administrator does not accept these.

The simple IRA is with Edwards, and they tried to send the paperwork in. When they told me that it could not go through, I called the new plan admin and was told I could not do this. They did not say why, just that it could not be done.

Thanks for all of your assistance.

Mynion · #6 (**permalink**) 11-09-2007, 10:33 AM

Dru and Gary have given you very good information.

I would like to add that, if it were me, I'd probably also consider rolling that Simple IRA into a Traditional IRA (tax-free direct rollover). This will get you out from under the old Simple plan's rules and under Traditional IRA rules. Also, it will give you more control over the investments inside the IRA.

Consulting a trusted financial planner/advisor/consultant couldn't hurt. Don't put any new money into your 401k until you build up an adequate emergency fund (typically 6-months worth of income).

Sponsors