If you cash out a 401k fund early, can you claim exempt when you cash it out and pay the taxes at years end?

Answer 1

Don't even think about it. The IRS is very unforgiving with people who try to skirt the rules - especially one as simple as the required witholding on early 401k plan distributions.

If you are seperated from the company, you might roll it into an IRA, then set up a regular monthly distribution from it - which is still taxable but avoids the 10% penalty. You will need help on this from a bank, financial advisor/brokerage house and/or CPA.

Answer 2

No way!

First off, tax is due when the income is earned, NOT when you file your return. Even if you could dodge the ball on the withholding, you'd still have to make an estimated tax payment.

Early distributions from a qualified retirement plan are subject to statutory withholding at 20% regardless of what you claim on your W-4. In most cases you can't withdraw from a 401(k) while you are still employed and the plan administrator wouldn't have access to your W-4 anyway, so claiming exempt on your W-4 would be a meaningless exercise.

Even with the 20% withholding, most taxpayers will not have enough withheld and will STILL owe at the end of the year, possibly with penalties for underpayment of tax in some cases if they don't make an estimated tax payment when they get the distribution.

Answer 3

Not legally, and your plan admistrator probably wouldn't let you do that. If you did, you'd be subject to penalties at years end for underwithholding.