401(k) cashed out automatically by former employer [CA resident, US citizen]

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
jriddy
Posts: 6
Joined: Wed Aug 01, 2018 5:43 pm

401(k) cashed out automatically by former employer [CA resident, US citizen]

Post by jriddy »

My 401(k) was cashed out and sent to me in a check by my former employer. I understand I have 60 days to move this to a new IRA, although that is difficult since 1) I haven't been able to find a reasonably priced IRA provider that will touch me since I'm a Canadian resident, and 2) I don't have the extra 20% cash to cover the amount that was withheld.

What are the implication of just keeping the disbursement? This year I won't make more money than covered by the foreign earned income exclusion, so is my effective US income just the amount of my disbursement, i.e., will I be taxed at that very low rate on that + 10% penalty?
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: 401(k) cashed out automatically by former employer [CA resident, US citizen]

Post by nelsona »

Well, once your total income exceeds your 2555 income exclusion, you are taxed at a blended rate, which will probably be higher than if you had only 401(k) income.

Some questions: What 401(k) company cashed you out, what warning/reason did they give you, and how much was your nest egg?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
jriddy
Posts: 6
Joined: Wed Aug 01, 2018 5:43 pm

Re: 401(k) cashed out automatically by former employer [CA resident, US citizen]

Post by jriddy »

I got some more info elsewhere...it will be taxed at the "stacked" rate, so basically at the top of my bracket before I can take FEIE off.

My former employer was the one that managed the fund, and the reason ended up being a very poorly worded email I sent sometime last instructing them to do this :(

The fund was only about $20k, so it's not a huge loss. I'm going to move the non withheld amount to another IRA (I think Fidelity lets me do this even living abroad) and just take the tax hit on the withheld amount since I don't have the cash to cover that in 90 days.

Thanks
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: 401(k) cashed out automatically by former employer [CA resident, US citizen]

Post by nelsona »

Its actually a blended rate, but why quibble. The penalty will apply to the 20% that you don't pony up.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Post Reply