taxes on a 401k?

Question

I am changing jobs and I want to take out my 401k to help with some outstanding debts. It is worth about 23,000.00 but I owe around $2000 on a previous loan, so that brings it down to about 21,000.00. My employer will hold out 20% for taxes and a 10% penalty....adding my 401k to my estimated yearly earning, my total taxable income is about 55,000.00 +/-. We have 5 dependents and have never made enough to have to pay taxes. What is the likelihood of having to pay taxes on this lump sum distribution?

Answer 1

I would say that with 5 dependents, $55,000 probably still isn't enough to pay taxes. If you did have to pay, it would be very very little. Remember, they are already holding 20% for taxes as it is.

I will advise that you roll over your 401K if you can. If not, roll it into an IRA and make a withdrawal from the IRA. Taking out $21,0000 from your 401K now will have huge implications on your retirement income. Remember, its the "future dollar" standards and the lost interest that are really going to kill you. If you can avoid taking money out of your 401K, I beg you to reconsider your decision!

Also, if you are REALLY nervous about the taxes, you can ask them to withhold more than 20%. Its a simple change in the receipt form.

Answer 2

First, if you only owe $2,000 you shouldn't touch your 401K to pay it off. Except in extreme cases, that money should be off-limits- especially if: 1) you own a house and can take a home equity loan; 2) you don't have terrible credit and can seek other funding to make paying off the $2k easier over time (even a credit card with 0 interest for six months- and then close out the card after month 6).

But if you do the distribution you will owe taxes of some sort since you are taking pre-tax money (I assume) and so have not paid any of the basic taxes yet. Whether you can get that back at tax time is another story, however.

But don't think short term. Keep the 401k in tact and find another way to pay off the debt.

Answer 3

Not a good idea. It will be high.

What are the debts you are paying? It may be wise to just make some type of payment arrangements or something.

Answer 4

were your 401k contributions taken out pre-tax (most are)? In that case you'll likely pay taxes.

Answer 5

You'll have to pay taxes, it's a requirement of any regular retirement fund if you draw from them.

Answer 6

It is normally about 30%. It's going to nail you big time come tax time. You would be wise to roll it over.

Answer 7

it depends on your age and how much is actually being used....i would consult a finance lawyer or someone in that field

Answer 8

Very high - you will have to pay