Tax Question: What happens if I want to take my money out of my 401 (k) account?

Question

I have had a 401k for a couple of years it has about $4000 in it. I only make about $12,000 a year and need this money. I am thinking of cashing it in. Currenlty it is invested in a CD. I am single, and have some deductions (Teacher expenses, school expenses, and student loan interest) how much money will I lose by cashing this in?

Answer 1

In your most likely scenario, you will pay a 10% tax penalty PLUS income tax on the $4,000 as if it was earned income. You didn't pay tax on the money when you put it into the 401(k) so the IRS is going to tax it coming out. Based on the limited information of your deductions disclosed, you'll be paying either 10 or 15% of the withdrawal as income tax so plan on forfeiting about $800 - 1,000 of that withdrawal to the IRS as tax and penalty.

If you can qualify under their definition that this is a hardship withdrawal, it is possible that the penalty portion may be waived. Here's what would need to be approved by the IRS to get out of that penalty from their regulations:

"A distribution is deemed to be on account of an immediate and heavy financial need of the employee if the distribution is for:

Expenses for medical care previously incurred by the employee, the employee’s spouse, or any dependents of the employee or necessary for these persons to obtain medical care;

Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);

Payment of tuition, related educational fees, and room and board expenses, for the next 12 months of postsecondary education for the employee, or the employee’s spouse, children, or dependents; or

Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence."

You may also note from their regulations:

"Hardship distributions - A 401(k) plan may allow employees to receive a hardship distribution because of an immediate and heavy financial need. Hardship distributions from a 401(k) plan are limited to the amount of the employee’s elective deferrals and generally do not include any income earned on the deferred amounts. If the plan permits, certain employer matching contributions and employer discretionary contributions may also be included in hardship distributions. Hardship distributions cannot be rolled over to another plan or IRA".

All that to say the amount you can take out as a hardship distribution is limited to the amount of money you put into the 401(k) and not the earnings you may have made on that money. Those earnings would be kept in your 401(k) account and taxed when you (or your estate) qualify for a normal distribution which is:

The participant dies, becomes disabled, or otherwise has a severance from employment.

The plan terminates and no successor defined contribution plan is established or maintained by the employer.

The participant reaches age 59½.

Clear as mud so far? There's more to it.

All 401(k) plans are different. In some, the employer matches some or all of your contributions up to a maximum of 3% or your income in the year you made the contribution, some plans do not. Depending how your plan was written by your employer you may or may not be able to withdraw their matching portion.

I've seen other answers to your question suggesting that you borrow the money from your 401(k). It's not a bad idea at all BUT not all plans allow for it to happen.

Find out who is the trustee or administror of your 401(k) is. They should be able to guide you right through the process and tell you how much is able to be withdrawn.

Answer 2

Asumming you have the right to take it out in the first place (such as you have quit or retired) do not take the money out and spend it.

Any money you withdraw will be immediately taxable at your current tax rate. Any portion of the money that comes from elective deferrals will be hit with an additional 10% excise tax if withdrawn before you hit 59 1/2.

The biggest loss will be all the years of earnings you are tossing away. Assuming you are 25 right now and a modest average growth of 6%, that $4000 will have turned into $40K+ at 65. Now is the time for you to save so your money has a long time to grow and you aren't left hoping the government will support you.

If you can't afford to add to your retirement savings right now that's understandable but it's not a good idea to gut what you have already saved unless you have no other choice.

You should also be way more aggressive with your investing. A CD is fine when you are trying to preserve wealth. At your age you should be going for more aggressive earnings.

If you have the right to withdraw the money you should move it to an IRA. In an IRA you make the investement choices and are not limited to the options the employer offers.

Answer 3

Tax plus a 10% penalty. So right off the bat you're hit with a $400 penalty, meaning you only get $3600. But you have to pay tax on top of it, and it will probably bump you into a higher bracket. So you'll only realize about $2800 of your $4000 by cashing it in now.

And worst of all, the taxes won't be withheld from the money you get, so you'll have to pay them all next year.

If you REALLY want to feel sick, consider this -- if you leave that $4000 alone for 20 years, earning a very modest 7% in a CD... you'll have just over $15,000. And that's even if you don't contribute to it; if you can put in even $600 a year (that's only $50 a month), in 20 years you'll have over $40,000.

Answer 4

You are assessed an early withdrawl fee of 10% (if I remember this correctly--- it may be more but I know there is a penalty) plus you need to pay taxes on it. If you end up with $3000 of that $4000 you will be very lucky. It's not really worth it in my opinion.

Answer 5

You can borrow from your 401(k), up to 50% of the money in it, and the interest you pay on the money you borrow is paid to yourself. The only time you can liquidate your 401(k) and withdraw all of the money out of it is when you stop working at that employer. If the 401(k) plan allowed you to take money out, it would essentially disqualify the entire 401(k) plan, and this would affect every other employee that are also contributing to the 401(k).

Answer 6

If you take it all out, you won't get it all; there's a 10% tax penalty for early withdrawal, with a couple of exceptions, plus you'll pay the taxes that were deferred.

Go to the IRS website http://www.irs.gov for more info.

Answer 7

You will lose the amount you will take out from the 401K..

another place you can look for the answer is http://www.TaxForum.us - it is a forum about United States taxes

Answer 8

You only are allowed to receive about half of it if taken out early plus you are penalized big time for taking it out. Leave it there. With only 4,000.00 it wouldn't be worth it.

Answer 9

CAN I TAKE MONEY OUT OF IRA TO PAY FOR HEALTH INSURANCE

Answer 10

ask the bank...thnx 4 the 2 pts