What happens if you take your 401k out way too early?

Question

If you start a 401k with a company at the age of 20 yrs old, work for the company for about 3 or 4 years, leave the company to pursue a better career opportunity and decide not to roll the 401k over into a IRA or other form of investment.

Is it true that the government takes most of it in taxes to penalize you for taking it out sooner, even if it's like only $1500 or so???

Answer 1

If you take a distribution of these funds, the 401k plan is required to deduct 20% for federal taxes. At the end of the year, you will receive a 1099-DIST which will show the taxes you have paid. WHen you enter this on your return, you will be hit with a 10% penalty for early withdrawal. Depending on your tax bracket, the 20% deduction may not be enough to cover the penalty and the taxes actually due on this amount.

It may not seem like much, but if you can roll it over into your new companies plan, I would do that. Even though you are young, every penny will count towards your retirement.

Answer 2

No, it is NOT true that the gov't takes half. [Many of the people who have answered this are just flat wrong!]

Since you did not pay taxes on that money when you earned it, it is taxable when you withdraw it. Plus a 10% penalty for early withdrawal.

You are far better off putting that money into a traditional IRA. You will not only preserve the tax deferral, and avoid the 10% penalty, but most important, you will be building for your retirement.

The only way not to get old is to die young. But if you are lucky enough to get old, you can be old and rich, or old and poor. Which would you choose? And what are you going to do to make that happen??

Answer 3

I can only speak from my experience:

I had to w/d several thousand $ from my IRAs due to divorce, and I had to pay INCOME on the amount I received and I was PENALIZED for withdrawing early.

In hindsight, I should have just borrowed on it. Hind sight is 20-20. Expensive lesson learned.

Just call your HR manager; if that person doesn't know, then they can give you a contact at your 401K firm and ask them direct. Another person to talk to would be an attorney that specializes in estate planning and such.

042007 4:14

Answer 4

The law is that you pay a 10% penalty to the government for taking it out early. The income is all taxable. Most plans are required to withhold 20% in order to cover the additional penalty tax and income tax. States tax you too but I think in CA its around 3 %.

Answer 5

401K is your retirement plan that you get from your employer. Since you are working, you should have a will that would tell your heir apparent what they can do with the money if you die. If you have no relatives, you can have an attorney obey the wishes of the will. You can donate the money to a school or charity, perhaps setting up a scholarship fund in your name.

Answer 6

It will be taxed at whatever your present tax rate is. You will also be missing out on the capital gains and dividends. Also if your company matches your contribution but you aren't vested, you will lose out on the money. If you wait until you retire you will probably be in a lower tax bracket, and will have other deductions.

Answer 7

We took ours out early and there was not much in it, but the government did not take much, there were some big penalties by the company though.

Answer 8

Yes the government taxes it
and yes you will have to pay penalty fees for taking it out early.
Both the taxes and penalties are percentage based.
http://www.401khelpcenter.com/

Answer 9

that is so true,you get a penalty for not rolling the money over at tax time.

Answer 10

Yes, I borrowed some of mine for hard times ( that was 3 years ago) and I am still paying them to this day. I say don't touch it unless you have to.