She was told because she is borrowing fifteen hundred dollars that the penalty is seven hundred. Is that possible?
2007-07-02 05:09:10 · 6 answers · asked by Toni E 1 in Business & Finance ➔ Personal Finance
The penalty won't be $700, but the total tax bite including penalties could well be.
The withdrawal from the 401(k) is taxed as ordinary income. The tax will depend upon their marginal rate. If they are under age 59 1/2 there is a 10% penalty tax on the withdrawal. State taxes also come into play and there may be taxes and penalties at the state level. These could easily add up to 50% or more of the gross distribution.
Additionally the withdrawal is subject to mandatory Federal withholding at 20%. State withholding may also be required. A $1,500 withdrawal will therefore only net $1,200 in proceeds, less when state withholding is taken into account.
The person making this loan from their 401(k) funds is NOT making an astute financial decision! If they are still employed by the sponsoring company a withdrawal for this purpose may not even be allowed by the plan sponsor. It would make MUCH more sense for them to take out a loan against the 401(k) than to withdraw the funds. Not all plans allow loans but most do. Interest is charged on the loan, but the interest goes straight back into the 401(k) plan so you're really just paying yourself the interest. The primary "gotcha" in this scenario is that if you leave the employer (quit, fired, retire, die, etc.) you must pay back any outstanding loans in a short period of time or the outstanding balance will be considered a withdrawal and any taxes or penalties will kick in automatically.
2007-07-02 05:24:57 · answer #1 · answered by Bostonian In MO 7 · 0⤊ 0⤋
If you withdraw pre-tax money from your account before age 59½, you may owe a 10 percent early withdrawal penalty depending on your circumstances unless you qualify for an exception to this rule.
Then you have to pay the taxes for your bracket.
2007-07-02 05:15:15 · answer #2 · answered by csucdartgirl 7 · 0⤊ 0⤋
won't be in a position to do it retroactive. to verify that it to be a hassle it may might desire to be to purchase the dwelling house and to no longer pay off a private loan. so a great way as your 401k is in contact you will be able to desire to be paying off a playing debt....i'm no longer being glib yet your plan needs good documentation to justify making this distribution. attempt yet another motor vehicle first...in case you won't be in a position to locate the different potential to get the money then see if a 401k very own loan is an decision. pay it off as immediately as you are able to.
2016-11-07 22:58:42 · answer #3 · answered by ? 4 · 0⤊ 0⤋
It depends- if she is just taking a loan out against it, there is no penalty, just the interest. If she is actually withdrawing the funds, then yes there is a penalty. I believe it is a 50% penalty- but you would want to double check that amount.
2007-07-02 05:17:44 · answer #4 · answered by quortnie11 3 · 0⤊ 1⤋
Actually, that 591/2 rule is true, but most 401(k)'s allow you to make loans against them. When this is the case, you are not penalized by the 591/2 rule.
She needs to read the information packet about her specific plan. I would find a phone # and call them directly to discuss the implications.
2007-07-02 05:18:39 · answer #5 · answered by manabell 2 · 0⤊ 0⤋
Yes it is. You must read the penalty clause for that 401K to know what and how mush early withdrawal penalty's are.
2007-07-02 05:18:13 · answer #6 · answered by Jan Luv 7 · 0⤊ 1⤋