what is the penalty for withdrawing a 401k plan?

Answer 1

If you roll it over to an IRA within 60 days, then there is no penalty or tax liability at all. If you didn't, then (assuming all of your 401k is pre-tax):

If you pull out the money before the year in which you reach age 59 1/2, and you did NOT:

-die or become disabled

-use the money to pay for medical expenses that exceeded 7.5% of your adjusted gross income (bottom number on first page of 1040)

-take a series of substantially equal periodic payments made annually for the rest of your life (I had to put this one here to be complete, but this is a rare event)

then you have to pay a 10% penalty to the IRS. Otherwise, the 10% penalty will be waived. No matter why you pull out the money, you will have to include the entire amount you pull out as income in the year you pull it out.

However, if any of the money is part of your post-tax contribution, it comes out tax-free, penalty-free...but only the post-tax contribution...not the pre-tax contribution nor any earnings.

The vast majority of people who pull out money have 100% pre-tax.

So, if your 401(k) had no post-tax contribution and you pulled out $10,000 and you didn't roll any of it over to an IRA within 60 days and you don't qualify for any of the exceptions above, then you have to include the entire $10,000 as income AND you have to pay an additional tax of $1,000.

If your 401(k) had no post-tax contribution and you pulled out $10,000 and you didn't roll any of it over to an IRA within 60 days and your medical expenses exceeded 7.5% of your AGI by $4,000, then you have to include the entire $10,000 as income, but now your penalty drops to $600 (10% of $6,000).

Each state is different in how they handle income and early withdrawals from retirement plans. Consult your state tax forms or let us know what state you lived in when you pulled out the money.

OK?

Answer 2

There are a lot of variables (age, where you live, how much you take, why you take it, etc). I am going to assume you are a young person taking an early withdrawal.

Basically, you are going to pay regular Federal Income Tax on the withdrawal. However, because the money is counted as income, its gong to count with your annual income. So depending how much you take, it could bump you into a higher tax bracket. So if you normally make $20,000 a year and you take a $15,000 withdrawal, at the end of the year, you will be taxed for $35,000 and depending on tax brackets you could be taxed in a higher tax bracket too.

Also, the government wants you to use this money for Retiriement. So if you are under 59 1/2 you could face a 10% early withdrawal penalty on top of the income tax.

Then, if you have state taxes, you will be tagged there.

So...

Federal Income Tax (estimated) 25%
Early withdrawal Penalty 10%
State Tax 5%
------------------------------
Estimated Total Taxes 40-45%

So taking money from your 401K before you retire could really hurt. Most likely you could give almost 50% back to the government.

Answer 3

You'll take two hits if you withdraw before 59-1/2:

1 - A straight penalty (usually 10% of the withdrawal), payable to the financial institution (FI)

2 - Taxes on the amount you withdraw, at your current tax rate.

So let's say you withdraw $10,000 at the tender age of 35. Right off the bat, the FI docks you a grand for the penalty, so you walk away with a check for $9000.

Then, next April 15, you realize that the deduction bumped you up into the next tax bracket and you're now paying 28% -- AND it's on the whole ten thousand. So you owe the IRS an additional $2800 on top of whatever they've been withholding.

So that cool $10,000 drops to $5200 of actual spending money. Not such a smart deal.

Most FIs that offer 401(k)s have a program whereby you can borrow your own money, and pay it back -- with interest. But there are several benefits (and one risk) with doing it this way:

1 - You don't need to qualify for the loan -- hey, it's your own money, right? Just fill out their paperwork (or do it on line) and you get a check.

2 - You typically repay with automatic withdrawals from your paycheck (all of which should be spelled out in the loan form), over a time period you choose. So you never have to worry about how to pay it back -- it just gets handled for you.

3 - You pay interest, but the interest goes BACK INTO YOUR OWN 401(k). Not to the scumsucking bank, not to the weasel-walloping credit card company -- it goes into making your own retirement that much more cozy. (Note, however, that while your initial 401(k) contributions come out BEFORE taxes and reduce your tax burden, repaying a loan uses AFTER-tax dollars.)

Now, about that risk:: if you leave your company before you finish paying back the loan, you will have to pay back the entire loan then OR you get the Bad Thing -- penalty and tax. So be sure to read the fine print about what happens if you borrow from your 401(k) and quit -- can you negotiate new terms with them, or do you have to use your unused vacation & sick pay to pay them back?

So there's a quick overview of how to get the most out of your 401(k) before you're 59-1/2, In short -- don't withdraw from it unless your needs are really dire, because the penalty and taxes make it a really, really expensive way to get money. Borrowing against it, however, can be a very smart way to use the money now while continuing to benefit from it -- IF you're reasonably sure you aren't going to leave your job before the term of the loan is up.

Answer 4

I totally agree, and the penalty depends on the state you are in as well. If you borrow off your 401k instead of just taking a withdrawal, you will pay the interest back to yourself therefore not losing any money.
Be smart, don't take a withdrawal.

Answer 5

The vested volume is what's yours. The unvested volume is corporation matching money which you haven't any longer earned yet - so which you don't get those. study your 401(ok) plan precis description. once you're laid off, any unpaid very own loan stability right now turns into an early distribution situation to the ten% penalty and earnings tax. With something of the $6500, you are able to withdraw it (and additionally incur the penalty + tax) or roll it over into an IRA.

Answer 6

Among others, you will have to pay Income Tax on funds that were exempt at the time of deposit, and probably a Penalty as well- Its not a good idea- See if you can use it as Collateral for a loan in place of withdrawal.

Answer 7

It really depends on your filing status. If you withdraw the entire amount, you'll get taxed about 30%. At the time I was leaving my job, I had amassed about $40,000 in my 401(k). I had loans of about $8,000 left. After they took out for those loans and taxes, I still ended up with about $25,000. If you can help it, don't touch the money. Just roll it over to an IRA or your new job (if they have a 401(k) plan. You won't be penalized for rolling it over.

Answer 8

you loose what the company put in for you, plus you are taxed through the butt for what you put in. there is federal, state and another tax slapped on the principal, this is all taken out before you get your money. when they have stripped your account to bare minimum you will be given the rest. i know cause this happened to me and I swore I would never again open a 401K unless i was intending to die working for the same company.

Answer 9

Please see the details at
http://money.cnn.com/pf/101/lessons/23/