Someone that I know took out their 401K Retirement Plan before age 65.?

Question

And the damn government took out taxes on it......over half of the total amount. He had a total of about 13,000. The government took out over 8,000 and left him with only 5,000. He worked at his job for 18 years...and that's all he gets?????

There has to be something he can do about this!!!!

I saw the check yesterday. He showed it to me.
The total amount was $17,000. He had borrowed $3,000 a couple years ago. So that leaves $14,000. What's happened?? Why are they taking out $8,000 in taxes still?
He just did his taxes this year. He only owed $300 to the IRS, which he paid.

Answer 1

He can read the law before he does something stupid like this. The law clearly states that you pay ordinary income taxes for withdrawals from a 401(k) retirement plan. In addition if you withdraw before you are 59.5 years old you pay a 10% penalty. Plain as day, well known by lots of people and available information from every HR department.

Assuming he did not try to hide his withdrawal and, thus, incur further penalties the most he could have paid for the $13,000 withdrawal would be $5,850 ($1300 plus 35% of $13,000).

Your statement that "He worked at his job for 18 years...and that's all he gets????" is disingenuous. You don't know how much he contributed into his plan, how well he did directing his investments or anything else. So, don't try to lay the blame on his employer. All you know is he stupidly withdrew his money (and if you are right about the government take being $8,000) and failed to report doing so.

Answer 2

Something isn't adding up here. The top federal income tax rate is 35%, and unless he's married filing separately, that would only apply to taxable income over $336,550 - and if his income was that high, I'd think his 401K would be more than $13,000. Since he took it out before age 65, he'd also pay a 10% penalty on the withdrawal. Depending on where he lives, he might also be responsible for state tax. $8000 is 61% of $13,000 - no way taxes are actually that much, no matter what state he lives in. And a percentage like that wouldn't be deducted unless he specifically requested it to be. If he had too much withheld, then he'd get any overwithholding refunded when he files his tax return.

Answer 3

All distributions are taxed as ordinary income. If it was prior to age 59 1/2 there is also an additional 10% penalty tax.

The rate is nowhere near as high as your friend claims, however. The highest Federal marginal rate is 35%. The penalty tax would raise that to 45%. He'd have to have a 5% state levy to equal 50%, and that would be a lot less than $8,000. Most taxpayers would pay much less than that -- 40% or less in most cases.

If he only set aside $13k in 18 years he has only himself to blame.

Answer 4

How old is this person?

If he is over 59.5, then he will pay income tax but no penalty on the part of the 401k distribution that is either pre-tax contribution or earnings.

If he is under 59.5 and has no exception, he will pay tax as described above, plus a 10% penalty tax on top of that.

If the witholding on the 1099R is greater than the tax owed, when he does his tax return, he will get a refund of the difference.

In any case, the tax on $13,000 is not $8,000. There is more going on than is in your question. His tax rate depends on his other income as well, plus the state may have taken tax.

Answer 5

That person likely already had taken a loan from his plan. The government will only take 20% of the amount distributed. So if he had 13,000 they would have only taken 2,600. However, if he had an outstanding loan of 10,000 on top of that 13,000 for a total of 23,000 they would have taken out 20% of the 26, 000 or 5,200 and elft him wiht 8,000.

Doubtful that they took 8 and left him with 5k. That would have needed a 40k distribution (ie 27k loan and 13k in cash) and that simply doesn't happen. He shined you on and you fell for it.

Answer 6

you are able to have unvested funds (funds it truly is no longer truly yours until eventually particular situations are met) on your account, and also you are able to flow them between investments. that is all frequent. economic establishments save very close music on what funds are vested (you funds loose and clean) and what funds are literally not. it may say on your truth how a lot of each you've. only because you are able to flow it to diverse investments, would not advise you'd manage to eliminate it from the 401K. If the money are particularly no longer vested, once you attempt to flow them to constancy, your economic instituion will block the flow, and in reality flow the vested funds. in the journey that they enable the flow, then you funds were totally vested and also you've no longer something to agonize about. i'm no longer particular how some time previous you left your activity, yet some establishments do issues on a quarterly or annual foundation. the organization could eliminate the unvested funds on the top of the subsequent quarter, or on the top of the year. it is going to easily be a subtraction on your truth, likely with an particularly standard call. they are going to save music of each and each of the unvested income to boot and take that still. There are more suitable human beings and computers checking and double checking those issues, than likely doing the artwork of the organization. in the journey that they allow you to move unvested funds, someone receives fired. yet no longer you!

Answer 7

NOPE 401k is pre tax dollars, do you have to pay taxes on it when you take it out and if you take it out early you pay penalties

Answer 8

you get penalized more for every year that you aren't 65, the reason why the government taxed it is because, when you put into the 401K it is before taxes are taken out, if they just needed the money for an emergency they should have taken a hardship loan against it.