Cashing out 401K?

Question

I am considering cashing out my 401K when I leave my company next month. I am not retirement age. I have a vested balance of $60,000 available. What are the tax penalties? I think that it is 20% right off the top and then subject to a 10% tax penalty when I file my taxes in January. Is that correct?

Answer 1

You are correct.

I went thru this last year.

They will deduct the 20% before they send you the check.

And you pay the 10% on your 1040 form, line 60.

You will get a 1099R from your company or whoever handles your investment, which list the 20% taken out as tax.

Make sure claim that on your 1040 as tax paid.

Answer 2

It's best that you stop considering it right now. If you must pull it out (most companies will let one that large stay put) roll it over into an IRA. That won't cost you a dime in taxes.

Your numbers are not quite right. It will be fully taxed at your marginal rate. Then there's a 10% penalty on top of that.

The 20% withholding is rarely enough to cover the entire tax liability so you'll need to salt away another 5% - 15% depending upon your marginal rate to settle up on tax day.

If you're in a 25% tax bracket, 35% of it will be gone for good. This is NOT a very bright idea as you can see as you'll be left with only around $39k after taxes. And that's if you don't have a state income tax. Kiss off another $6k - $12k depending upon your state's tax rate. DUMB move, IMHO.

Answer 3

There is a mandatory 20% withholding up front, 10% penalty for early withdrawal, and income tax due on the full amount. Larger withdrawals put you in a higher tax bracket, too. That's just at the Federal level.

The smart thing to do would be to roll it over into an IRA.

Answer 4

I believe it's a 10% penalty, and you would also have to pay income taxes (federal and state) on the amount withdrawn.

Unless you are experiencing some sort of financial crisis, it is unclear to me why you would do this. You could either leave the $60K in your company's plan, possibly transfer it to your new employer's plan, or roll it into an IRA. If you do that, the money will continue to accumulate (tax-free) until you do retire.

Answer 5

You'd pay income taxes at whatever your rate is - the $60K would be added to your other income for the year. The rate might be more than 20% - if they only withhold 20%, then you'd pay any additional when you file, in addition to a 10% penalty for early withdrawal.

A better idea is to roll it over into an IRA.

Answer 6

There is a 10% ($6,000) penalty plus income tax as ordinary income at your regular tax rate. Most companies will withhold 20% (Federal). You could ask for more withholding.

Answer 7

Good for you for putting so much aside! Now keep it there or roll it over into an IRA unless you have absolutely positively no other options. Do you really want to throw away at least 18,000 dollars of your own money?