10% penalty question
L1: 10% penalty questionHello, I am currently several years into a 72T from My Schwab IRA account. Today I got a notice from my Fidelity 403B that there is 75 bucks in there that they need to distribute to me since I do not meet the account minimum. I no longer am working, ie retired. So since I am 52, will have to pay the 10% penalty on this 75 bucks. This is no big deal, except that I am doing this other 72T on the Schwab account. Will this throw up a flag to the IRS to audit me, since I am paying the penalty on the Fidelity but claiming a penalty free dist on the Schwab IRA? I really do not want to open another IRA or Roth to rollover this little amount of money. Am I needlessly worrying, or what?2011-01-04 02:40, By: TheresaM, IP: [126.96.36.199]
L2: 10% penalty questionThere is no need to be concerned that a distribution of the $75 will result in any scrutiny of your 72t plan. It is a separate 1099R and reported on line 16 of Form 1040 vrs line 15 for the IRA based 72t.
You could also roll it over to a different IRA than your Schwab 72t IRA but unless you already have a separate IRA open to roll it to, it probably is not worth all the hassle to open an account to save $7.50.
But be sure you specify your instructions to Fidelity, particularly if your Schwab IRA was a rollover from this same 403b plan. In that case, the plan could attempt to roll it to the same IRA that received the earlier rollover, and if that IRA is your Schwab 72t IRA, the follow up rollover presents a real problem.2011-01-04 04:17, By: Alan S., IP: [188.8.131.52]
L3: 10% penalty questionAlan S is absolutely correct when he said …
“But be sure you specify your instructions to Fidelity, particularly if your Schwab IRA was a rollover from this same 403b plan. In that case, the plan could attempt to roll it to the same IRA that received the earlier rollover, and if that IRA is your Schwab 72t IRA, the follow up rollover presents a real problem.”
Now you need to follow-up on Alan’s comments and contact Fidelity immediately is not sooner! If your Schwab IRA was funded by a “trustee-to-trustee transfer” or “rollover” from any Fidelity IRA or 403(b) account, then security rules provide that any transfers SUBSEQUENT TO the initial transfer will follow the last transfer instructions. So you need to have Fidelity send you a check payable to you individually or payable to an existing IRA, OTHER THAN your Schwab 72(t) account. If Fedelity sends the check to Schwab and it is deposited in your 72(t) account then you have a busted plan!
Jim2011-01-04 15:47, By: Jim, IP: [184.108.40.206]
L4: 10% penalty questionThanks for that sound advice. Yes the Schwab IRAwas a trustee to trustee.Since it is only 75 bucks I would rather just take it and pay the penalty. Alan says it would not throw up a red flag towards my 72T from the other account. I really do not have the money to put into a new IRA as I am not working and I need what little after tax savings I have for an emergency. If I were to open a rollover IRA to recieve this $75 I would do it at fidelity, ie different company and different IRA than the Schwab IRA. What would ya’ll do if it was yours, take the money, or roll it into a Fidelity rollover IRA? The whole idea is to lay low!! LOL.2011-01-04 16:26, By: TheresaM, IP: [220.127.116.11]
L5: 10% penalty questionBased on your last post, take the money, pay the extra $7.50 penalty and have a nice dinner out.
Nobody but the bank will open an IRA for only $75, and even that may be too small of an amount.
Jim2011-01-04 16:44, By: Jim, IP: [18.104.22.168]
L6: 10% penalty questionWell, just to follow up, i called Fidelity, and they said anything less than $1000 is sent as a check made out to me only automatically. IE the security laws do not apply to these low amounts. He said if I would havehad $1000, I would have never recieved the letter and the Fidelity account would stay open.2011-01-04 17:32, By: TheresaM, IP: [22.214.171.124]
L7: 10% penalty questionThat’s an interesting statement from Fidelity …
“IE the security laws do not apply to these low amounts.”
I can’t explain why they would make this statement. I have had much smaller amounts follow my clients’ transfers; less than a dollar in one case.
Anyway, enjoy your dinner when your check arrives.
Jim2011-01-04 17:45, By: Jim, IP: [126.96.36.199]
L7: 10% penalty questionI agree, very interestingresponse from Fidelity and one that should caution/warn anyone that has a SEPP plan at Fidelity.
Based on the statement, if the plan had been a SEPP in which you took the maximum amount for the year and then did a transfer to a new trustee, that extra dollar amount sent directly to youwould have busted the plan.
I suppose that if eligible, you could have done arollover of the extra dollars, but in some situations that may not be possible.2011-01-04 17:56, By: Gfw, IP: [188.8.131.52]
L8: 10% penalty questionWell, you never know who you will speak to when you call a huge company, and the person may say or implysomething totally incorrect.Also, I may have misunderstood this person, but I think Fidelity is a good company, and this person was just not correctly informed. Since this is a 401a DCP account , I was told the former employer calls the shots how these amounts are taken care of such as amounts less than $1000 are sent to the person, and over that put into a Fid. IRA. I’m not sure but I would think that plan wouldn’t do a SEPP, only from a IRA or maybe 401K. In this case they are trying to close out the account.2011-01-04 23:07, By: TheresaM, IP: [184.108.40.206]
L9: 10% penalty questionMost likely, when the Rep referred to “securities laws”, he meant the tax code provisions relating to small balance DC plans. For balances under $200, the plan does NOT have to offer a direct rollover, but for balances between 1,000 and 5,000, if you do not respond to their distribution letter, they must open an IRA for you and do a direct rollover into that IRA. In your case, the balance is so small, they are telling you the only option is that a check will be made out to you. The amount is also small enough that they do not have to withhold the otherwise mandatory 20%. You are then free to do a 60 day rollover to an IRA if you wish, but as others have indicated, the best option for a balance this small is to just cash out the distribution and pay the 7.50 (actually 8.00 after rounding) on Form 1040.2011-01-05 03:55, By: Alan S., IP: [220.127.116.11]